East & Southeast Asia
East Asia consists of countries such as China, Japan, North and South Korea, and Taiwan. Southeast Asia is a geographic region which lies south of China, east of India, and north of Australia. This region includes countries such as Indonesia, Vietnam, the Philippines, Singapore, Thailand, and Malaysia.
The Players:
- Xi Jinping: China's "ruler for life." General Secretary of the Communist Party of China. Born in 1953, elected as the president of the People's Republic of China in March of 2013.
- Kim Jong-un: aka Li'l Kim; 3rd "Supreme Leader of North Korea." (His grandfather and father were the 1st and 2nd, respectively.) Born in 1983, Kim rules his country with an iron fist, willing to order anyone killed who he feels threatens his reign, or even those who have slighted him—including family members (he had his uncle executed in 2013 and his half-brother poisoned in 2017). He has one goal in mind: re-joining the two Koreas together under one (his) rule.
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Japan Elections
02 Oct 2024 |
A win for democracy: Japan's new leader is a serious China hawk
Japan's ruling Liberal Democratic Party (LDP) has selected 67-year-old Shigeru Ishiba to become the country's next leader. This was not welcome news to China, as Ishiba has been a strong voice against the communist nation's aggressive behavior towards its neighbors, going as far as to advocate an "Asian NATO" to protect democracy in the region. Ishiba described the current security environment surrounding Japan as the toughest since the end of World War II, and has proposed a revitalized Japanese/American military alliance which includes the joint management of US bases on the island. He has also called for bolstering military ties with South Korea, the Philippines, and other countries in the region being threatened by China's wanton and belligerent acts. It should be noted that the new prime minister is also a former defense minister of the country. Despite recent scandals tarnishing the image of the LDP, the ruling party for most of the post-World War II era, Ishiba is seen as a fresh face among most voters; an important consideration since he has called for a snap national election on 27 October. If elected by the Japanese people (as opposed to the appointment by his ruling party), he has promised to revitalize Japan's economy, strengthen its military, and restore the image of the LDP. We have little doubt that Ishiba will win the snap election, and get about strengthening the Japanese economy. We are bullish on the country, and hold several Japanese equities within the Penn International Investor. Investors could also play the overall Japanese market via the Franklin FTSE Japan ETF (FLJP $30), which holds nearly 500 companies from various sectors. Top holdings include Toyota, Hitachi, and Sony. |
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China Trade
27 Mar 2024 |
A few years ago Xi was saber rattling; now he sips tea with US CEOs
It's amazing what dollar signs in one's eyes will do to cloud vision. After countless cases of IP theft, a chronically uneven playing field, the self-proclaimed narrative about taking over as the world's leading economy (how's that going, by the way?), we have Chief Antagonist Xi Jinping dining with American business executives, flashing his best Winnie the Pooh grin, begging them to bolster investments within his country. The meeting spoke volumes. Sadly, we suspect many of these "wise and seasoned" execs were totally taken in. China's vice president told the group that "investing in China is to invest in the future," but foreign companies have been moving in the opposite direction for the past four years. Foreign direct investment began falling during the pandemic, and there is no sign that the exodus will end anytime soon. That drawdown has filtered through the economy, causing Chinese citizens to guard their pocketbook. A vicious cycle of reduced consumer spending at home and the dumping of excess goods abroad is underway, and Beijing looks flatfooted in its response. Two real-world examples: iPhone sales in China fell 24% y/y through the first six weeks of 2024; meanwhile, Brazil, India, and South Africa—three fellow BRICS members—have all lodged formal antidumping investigations on specific goods coming from China. The Western world faced similar challenges with respect to Japan some forty years ago, but that democratic, pro-free-trade nation made changes to assuage concerns. China seems to be going in the opposite direction of increasing state control when things aren't going their way. It is the very definition of a command economy—one in which a centralized government tries to control all aspects of supply and demand. That is a fanciful concept which has never worked. As for the CEOs, many would no-doubt like to see the US ease restrictions placed on trade with China over the course of the past two administrations. But considering we have the same two players in the race this election cycle, odds of that happening are near zero. Expect China's economic woes to continue. Sadly, the Chinese people will bear the brunt while the communist government will simply double down. With respect to China, an economic story always has a geopolitical component to it. Just as they stripped the golden goose that was Hong Kong, they are now looking at the incredible wealth and power of the Taiwanese economy with envy. If they see a United States tiring of its defense of Ukraine against a Russian aggressor, they will eventually calculate that an invasion of land they already claim as theirs is worth the risk. We can't believe there are Americans who would say this is not our business; then again, there were plenty of Americans before December 7th, 1941 who said we had no business getting into a war on the other side of the world. |
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Evergrande
30 Jan 2024 |
Another Chinese facade exposed: Evergrande ordered to liquidate
The Chinese real estate market accounts for approximately one-fourth of the communist country's economy. Just as Americans invest in the stock market, middle- and upper-class Chinese citizens invest in property, which is a serious status symbol amongst the culture. Some 70% of aggregate family wealth, in fact, is tied up in residential properties—the apartments they live in and investments in development communities built by the likes of Country Garden and Evergrande. The former has now defaulted on a chunk of its debt, and the latter has just been forced into liquidation by a Hong Kong court. Just a few years ago, the world was being shown images of grand new cities being built in China by the country's first- and second-largest real estate development companies. That facade has now been exposed, and Chinese citizens are filled with both shock and anger. After a weekend deal fell through, the Evergrande liquidation order means that creditors will be given full control over the company and its properties. Bonds issued by the firm are trading for a few cents on the dollar, and its $240 billion in assets is overshadowed by its $300 billion debt load. Much of the company's assets exist in the form of massive, unfinished high rise communities like the one shown below. About as far on the liquidity spectrum from cash as one can get, who would want to take over these concrete and steel nightmares? No wonder China's citizenry is in a funk; they watch helplessly as their investments become virtually worthless. At the time of the liquidation order, Evergrande had pre-sold some 1.5 million residences which have never been delivered. The damage up and down the supply chain, from lending banks to steel and concrete companies, is hard to fathom. The epicenter of the disaster will be the ordinary Chinese household. Xi may be president for life, but history has taught us that massive change can often occur with lightning speed. |
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Taiwan
TSM $101 15 Jan 2024 |
Global democracy notches a win in Taiwan; what will China do?
Expected or not, it was still an incredible victory. Standing defiantly against the world's second-biggest bully (behind Russia under Putin), the people of Taiwan just elected the country's vice president, Lai Ching-te, to be their new leader. To say the Communist Party of China loathes this man is an understatement. It labeled this election a choice between war and peace, but the voters were unintimidated. Lai's Democratic Progressive Party just won its third consecutive four-year term. China's horse in the race was KMT party candidate Hou Yu-ih; while promising voters that he wouldn't move toward unification with China, he was widely viewed as a Xi lackey. A spokesperson for the Chinese Taiwan Affairs Office said that the election does not represent "mainstream public opinion on the island," but gave no further details. Secretary of State Antony Blinken, meanwhile, said that the Taiwanese people had demonstrated the strength of their democratic system. Despite the fact that he is detested by the CPC, Lai, a Harvard-educated former physician, said he can keep the peace across the Taiwan Strait. While in past statements the new president said that he would work for full independence, he has since tempered those remarks; he now simply argues that Taiwan is already a de facto state. In addition to being a former doctor, when he was mayor of the southern city of Tainan, Lai helped bring a Taiwan Semiconductor (TSM $101) plant to the region. Born into a coal mining family, the new president lost his father at age two. Despite being raised in poverty, he worked tirelessly to excel in school and ultimately earn his medical degree. The youthful 64-year-old Ching-te seems well suited to lead Taiwan through what is sure to be a contentious period in its history. Beijing may be livid with the results of Taiwan's election, but we expect its response to be tempered. Cyberattacks will undoubtedly increase on the island, and Chinese warships will probably become more belligerent in the Strait, but the country's economic woes should keep Xi's attention focused on the mainland—for now, anyway. |
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INDA $44
07 Sep 2023 |
Both Chinese export and import levels continue to fall as economic woes worsen
Ever since China became a member of the World Trade Organization in December 2001, countries—led by the United States—have been propping up the communist nation’s economy by rushing to buy the goods produced by its poorly paid but massive workforce. Now, following the pandemic and increasingly belligerent government words and actions, the fanciful growth rate envisaged by leader Xi and much of the American press is getting a reality check. Not only has the volume of exports dropped every month since April, but imports have also fallen every month this year as Chinese consumers face mounting economic challenges at home. Goods leaving China fell by 8.78% in August from the prior year—a 9.5% drop with respect to the US—while imports fell by 7.34%. Factory activity in the country has been contracting since this past spring, and the youth jobless rate has been on such a steep incline that the government stopped reporting the figures to the public. A major source of angst for consumers is the crumbling state of the domestic real estate market. The country’s largest homebuilder, Country Garden, just barely avoided default by making interest payments on outstanding bonds hours before the grace period ended. Investing in real estate projects has been the most favored method of building wealth for Chinese citizens, but as confidence in the sector continues to erode, new construction starts and property investments have plummeted. Millions of Chinese families have been boycotting payments on their mortgage loans due to unfinished projects and substandard construction. The government is trying to assuage borrowers by ordering state-owned banks to cut the interest rates on existing mortgages, but the effect has been minimal. A telltale sign of who China blames for its economic problems—besides the United States, of course—is the country’s decision to skip the upcoming G20 summit in New Delhi. Russia, China’s new bestie, will also snub India by skipping the meeting. That is somewhat ironic since India has continued to enjoy a close trading relationship with Putin, to the chagrin of Washington. The weekend meeting will give Biden another chance to solidify America’s support of increased trade with India. If Prime Minister Narendra Modi can actually modernize India’s archaic business structure, that country could be the biggest threat to China’s growth rate going forward. Remember when the “must-have” international investment was a BRICs vehicle? We do. Brazil is once again being led by far-leftist Lula after he spent time in the pokey. He has invited Chinese warships to dock at Brazilian ports. Russia is a global pariah led by a madman. China is a communist nation hell-bent on ruling the world. That leaves one “BRIC” in the wall intact: India. Yes, enormous challenges remain, but the country is a democracy, and the government will eventually straighten out its byzantine business structure. The largest ETF providing exposure to the Indian market is the iShares MSCI India ETF (INDA $44). The fund has rallied some 15% since March, while the iShares MSCI China ETF (MCHI $44) has fallen nearly 22% since the middle of January. Investors may not recognize many names among the 122 companies in the India ETF, but we expect that to change over the coming decade. |
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China PPI
09 Aug 2023 |
China’s economy continues to contract
As most of the developed world continues to grapple with inflation, China has quite a different challenge: fewer people—both at home and abroad—are buying Chinese goods, causing a serious case of deflation within the country. China’s exports to the rest of the world fell 14.5% in July from the previous year, representing the sharpest downturn since February 2020—the earliest days of the pandemic. At home, real estate values are plunging, causing the average Chinese consumer to pull back on spending. Not only did consumer prices fall in July, producer prices fell for a tenth straight month, contracting 4.4% in July from the prior year. As is always the case in a controlled economy, the Chinese Communist Party believes it can ride to the rescue with more government action. The People’s Bank of China is expected to reduce rates in an effort to spur economic activity, and the CCP has announced a new round of massive government spending. But even if it works at home (it won’t), how is that going to help reverse the contraction in exports? Chinese goods shipments to the US fell some 23% in July from the prior year, and shipments to the EU dropped around 20%. After President for Life Xi announced his plans for global economic dominance while reiterating his support for Russia’s Putin, the Western world began scrambling to find alternate suppliers of goods to reduce reliance on the communist nation. While China’s exports to Russia have mushroomed since Putin’s invasion of Ukraine, that amounts to a drop in the bucket compared to the contracts which have been lost due to supply chain realignment. And China’s new exertion of control over quasi-private firms in the country will only exacerbate the problem. The only solution is a humble mea culpa by the regime and a distancing from Russia with respect to Ukraine, and there is zero chance that either of those actions will take place. Chinese companies may seem appealing on the recent pull back, but investors should steer clear of the country for the international portion of their portfolios. Instead, consider India, Vietnam, Malaysia, and a host of other countries which are directly benefitting from the corporate migration away from China. |
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China/Taiwan
27 Feb 2023 |
Xi tells China’s military establishment to be prepared for Taiwan invasion by 2027
According to CIA Director William Burns, Chinese President Xi Jinping has conveyed a strategic message to the People’s Liberation Army: Be prepared to invade and take control of Taiwan by 2027. To be clear, there is no possible scenario in Xi’s mind in which Taiwan is not fully under the thumb of Beijing. If anyone still believes that they don’t understand the mind of a communist like Xi and the history of Taiwan going back to 1949. Jimmy Carter certainly didn’t understand the mind of a Chinese communist, or he wouldn’t have cut ties with a democratic Taiwan in favor of improved relations with Beijing. But the myopia certainly hasn’t been limited to one party: both sides have been in power as the US became overly reliant on cheap goods and an enormous potential market in the East. Never mind that the Western values of individual liberty and personal freedom are anathema to communism. We wonder if anyone ever believed that the balance of trade between the US and China would be anything other than grossly lopsided? Now, despite that country’s unwillingness to take any responsibility for the pandemic unleashed on the world, many want us to believe that Xi is sitting back, watching his buddy Putin sink in the quicksand that is Ukraine, and second-guessing his plans to invade Taiwan. He is probably furious at his friend for shining the spotlight on the similarities between Ukraine and Taiwan with respect to their bully neighbors, but he would be sending arms to Russia for use in the conflict right now if the world weren’t watching his actions so closely. Just before the start of the Olympics, Putin promised Xi two things: that he would wait to invade until after the games had concluded, and that war would be swift and victory assured. Xi must be taken aback by both the toughness of the Ukrainian people and the cohesion of the Western world against this horrific act. The West must now make it clear that we are willing to defend Taiwan (and the president has said as much), and that a swift victory would not be possible. His mind may still be made up, but doubt has crept in—at least about going in before 2027. Americans should pay attention to where the goods they buy are sourced and also have a basic understanding of the modern geopolitical world. For example, Vietnam has been a major recipient of US manufacturing deals as companies scramble to exit China; Vietnam has strained relations with China and continues to be a growing economic partner to the US. The same could be said of Malaysia, Bangladesh, Taiwan, and India—though the latter has ruffled feathers with its continued purchase of Russian energy. The United States played a major role in China’s economic growth over the past generation. Now, with a full understanding of that nation’s strategic plans, we have the power to impede that growth trajectory. But do we have the stomach for it? |
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China GDP
16 Aug 2022 |
China cuts rates as economy slowing on nearly all fronts
Consider this: The US economy is slowing and layoffs are increasing, but the Fed remains committed (correctly so) to rate hikes; the European Union faces an even more severe economic slowdown and a brutal coming winter due to a Russian-fomented energy crisis, and the ECB is raising rates; China’s economic growth rate is slowing on nearly all fronts, and the People’s Bank of China just cut rates. That unexpected action by China’s central bank highlights the dichotomy between how the West and the East are dealing with an unwelcome mix of high inflation and probable recession. While China didn’t cut its interest rates by much (the main rate at which it provides liquidity to banks dropped from 2.1% to 2%), the government simultaneously announced it was pumping an additional $60 billion into its financial system to spur lending. The challenge with both of those moves is the fact that Chinese citizens are very reluctant to borrow right now due to angst over lockdowns, an economic slowdown, and a nightmarish real estate market. (The government is placing strict controls over the sale of properties by homeowners, adding to the apprehensiveness of would-be buyers.) For a communist party which bases its very existence on control, the inability to get its people to act in a certain way must be maddening. As for the economic slowdown in the country, economists are rushing to downgrade expected rates of growth. TD Securities, for example, just lowered its full-year GDP expectations to 2.9%, while UBS admitted to seeing “downside risks” to its 3% full-year growth forecast. Unlike the American consumer, which has been full steam ahead, Chinese consumers have purchased around half of the retail goods economists had expected by this point in the year. And there are scant indications that the situation will get better anytime soon. Of course, US retailers who became overly reliant on Chinese sales will also be hurt by the country’s economic slowdown. That fact, combined with the strong US dollar, should have investors searching for small- and mid-cap consumer cyclicals which receive the lion’s share of their revenues from domestic sales. |
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Chinese
Real Estate |
Latest Chinese reality check: a mortgage boycott sweeps the nation
(20 Jul 2022) For decades, the communist-controlled Chinese media has poured forth an endless stream of rosy stories about the country’s growth trajectory and the general happiness of ordinary Chinese citizens. Too often, a sycophantic Western press has “dutifully” regurgitated these propaganda-filled fairy tales. One such yarn revolves around the millions of housing units being built for the rising middle class in the country, and the excited would-be homeowners happily making mortgage payments on properties not yet built—a typical practice in China. Now, despite the iron-clad control over social media in the country, a darker image is coming into focus. There is a revolt taking place among a large number of Chinese homebuyers who have stopped making mortgage payments—or are threatening to—on their unfinished properties. Despite the censors’ best efforts, online petitions are circulating urging citizens to boycott making payments until they see results. With nearly $7 trillion worth of outstanding mortgage loans, the real estate industry accounts for nearly one quarter of China’s economy; these boycotts threaten to spread like wildfire, further dampening a recovery marred by renewed Covid lockdowns. Rising loan defaults are already spooking investors, which have driven down both bank and developer stocks by double digits over the past few weeks. How bad is the crisis? Analysts at Nomura Holdings, a Japanese financial holding company, estimate that just 60% of homes pre-sold to Chinese households over the past decade have been delivered. A slowing growth rate in the country’s economy will only exacerbate the problem. China’s wanton real estate boom was built upon unsustainable projections of forward growth—growth levels which couldn’t possibly be sustained as its economy matured. With Xi Jinping about to become ruler for life, the problem will be exacerbated by the government’s draconian response to economic challenges. |
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Philippines
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For the US, there was only one direction to go in the Philippines after Duterte
(16 May 2022) Many of us vividly recall the presidency of Ferdinand Marcos, and the endless stories written by the American press about his wife Imelda’s shoe collection. We thought back to his regime, which ended with a thud in 1986, this past week as his son, Ferdinand “Bongbong” Marcos Jr., notched a landslide election victory to become the next president of the Republic of the Philippines. For the United States, the importance of having a strong ally in this strategically critical region of the world cannot be overstated. Once one of America’s staunchest advocates in Southeast Asia, the country moved decidedly away from its old friend—and toward China—under President Rodrigo Duterte’s six-year rule. Until a last-minute change of heart, in fact, Duterte had all but cut military ties with the US by threatening to end the longstanding Philippines-United States Visiting Forces Agreement (VFA). Along with the election of Marcos Jr., Filipinos sent a clear message that they do not wish to be subservient to their would-be Chinese masters. Overwhelmingly, voters expressed their unease with Duterte’s cozying up to China’s Xi Jinping. For its part, American military exercises in the South China Sea have enraged China, and the country’s ruling communist party has done everything it could to poison the relationship—not a difficult task with the mercurial Duterte in power. Now, with a huge favorability rating he does not wish to squander, we can expect Marcos to govern in a manner more conducive to overall stability in the region, and that is not what China had been hoping for. Even though Duterte’s own daughter is the vice president-elect, this election was a clear victory for America’s interests in the region; as much of a victory, in fact, as the March election of Yoon Seok-youl in South Korea. Controlling the South and East China Sea regions are a linchpin to China’s grand ambitions, and the citizens of South Korea and the Philippines have indicated precisely what they think of those plans. |
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South Korea
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Victory for the US and the Western world: South Korea's surprise election results equal a stronger ally in the region (22 Mar 2022) It was a white-knuckler of a race, but when the dust settled South Korea had a new leader. Few expected Yoon Suk-yeol of the Conservative People Power Party to pull off the upset victory, but his win represents the growing angst in South Korea over Kim Jong-un's incessant saber-rattling and China's growing threat to the stability of the region. It also points to the failure of North Korea's decades-long policy of subterfuge; a policy which involves planting false stories and placing North Korean spies in the country to foment a distrust of the government. It has always been Kim Jong-un's (and his father, Kim Jong-il's) master plan to reunite the peninsula not in the name of peace, but in the name of communist rule. Yoon Suk-yeol's victory has splashed cold water on those plans. Not only has this charismatic leader spoken out against the rampant human rights violations in North Korea and China, he has also made it clear that he wants his country to become a "global pivotal state" on the world stage for the cause of freedom. Such language is anathema to Xi Jingping and his dear friend Kim Jong-un. Yoon's victory means he will lead the fourth-largest economy in Asia for at least the next five years. Over that period of time, we can expect much warmer relations between the US and South Korea, a demand that North Korea give up its nuclear ambitions as a basis for negotiations, and an upgrade to the US THAAD anti-missile system in the country—a system which China vehemently opposes. China and North Korea will seek to undermine his rule in every way imaginable, but something tells us this former prosecutor (of nearly three decades) is up for the task. The pandemic hit South Korea hard, with the country's GDP shrinking by 1% in 2020 before rebounding to 4% in 2021—an eleven-year high. There are three main ETFs to take advantage of South Korea's explosive potential. The Direxion Daily South Korea Bull 3X ETF (KORU $18) we would steer clear of unless conviction is very strong (due to its triple leverage). The Franklin FTSE South Korea ETF (FLKR $25) is run by—in our opinion—the best global investment team in the world (Franklin). and the iShares MSCI South Korea ETF (EWY $71) is the largest, with $4.5 billion AUM. Our personal choice? Go with the Franklin name, FLKR. In addition to Samsung, Kia, Hyundai, and LG, the fund is full of names which few would recognize—hence the importance of the management team. |
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Evergrande
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Evergrande, catalyst for a downturn, is a serious problem for China, not America
(22 Sep 2021) Few Americans had ever heard of China Evergrande Group before the company became the catalyst for a 900-point early session drop in the Dow this past Monday. Across Asia, however, the company is intimately well known—to the chagrin of millions of ordinary Chinese citizens who have their money sitting with the firm. Evergrande has tentacles enmeshed throughout a number of disparate industries, but first and foremost it is the second-largest land developer in China. Holding the moniker of the world's most indebted developer (debt now equals over $300 billion), the company has been building giant apartment complexes across China for a decade, typically selling the units to would-be owners years before they were completed. Evergrande could have been the poster child for Xi's China, showing the world that the country's growth trajectory was not flattening out. Much like the Chinese ghost towns, however, it was more Kabuki theater than reality, a show put on for the world while the internal problems continued to mount behind the scenes. Now, with hundreds of millions of dollars in interest payments due over the coming months and no cash left in the till, Evergrande teeters on the edge of insolvency. The US markets had their early-morning panic attack due to fears of contagion: that Evergrande's pending collapse might spell another "Lehman moment." But as the week dragged on, it became clear that the Chinese Communist Party wouldn't suffer such an insult; they would step in to limit the damage. As Chinese citizens lined up at the group's banking units around the country to demand their money back, Evergrande has taken to paying off debt with unfinished housing units instead of yuan. While the CCP will be forced to make good on any payments made by its citizenry for the never-to-be-finished apartment pads, the wealthy executives at Evergrande will not find a kind and forgiving government. Nor will the millions of bondholders throughout Asia who own the junk paper issued with reckless abandon by a company with an insatiable appetite for risk and other people's money. By some accounts, Evergrande bonds make up some 10% of the entire Asian junk bond market. The pain will be felt, but not so much on this side of the globe. China has a systemic problem of epic proportions. Ruling communists believe they can run an economy with an iron fist while simultaneously reaping the rewards of global free trade. It is impossible for these two conditions—total control and unfettered market access—to coexist. The rest of the world will come to understand that fact long before it is accepted by the Chinese government. In the meantime, it behooves both investors and the Western companies operating in China to avoid country risk by looking elsewhere for growth and opportunity. |
Communist China forces shutdown of Hong Kong's last remaining pro-democracy newspaper
(24 Jun 2021) We recall, back in the late 1990s, how silly the argument seemed: although sovereignty over the British colony of Hong Kong was being passed to China, many so-called experts were telling us that the communist nation wouldn't dare kill their golden goose. Granted, it took a few decades to quell the basic hallmarks of a free society, but this week pretty much sealed the deal. Apple Daily, the wealthy island's last remaining pro-democracy newspaper, has been killed. It began with the (second) jailing of the paper's majority owner, Jimmy Lai. Then, Hong Kong's puppet regime froze the company's assets and seized its journalists' computers. The final straw was the arrest of two top executives under a new national security law Beijing imposed on the island to stifle dissent. Following that move, Apple Daily reported that both its print edition and website would cease operations. It is the beginning of a full-scale collapse of freedom in Hong Kong, which begs the question: how much longer can Taiwan remain a free country? Furthermore, what will the United States, which is bound by agreement to protect the nation from Chinese attack, do when the inevitable begins to unfold. America wouldn't have dreamed about accepting wave after wave of goods-laden shipping containers from the Soviet Union during the Cold War, yet we are funding the insatiable appetite of Communist China, and its dreams of global domination, by welcoming in some $500 billion per year of goods from that country, even though China only imports around $130 billion per year of US goods. This situation must change. If US companies are unwilling to break the deadly cycle and search elsewhere around the world for imports, they must be strongly coerced by the federal government to do so. Better yet, they should consider saving on the shipping costs by manufacturing domestically—or at least within the USMCA region.
(24 Jun 2021) We recall, back in the late 1990s, how silly the argument seemed: although sovereignty over the British colony of Hong Kong was being passed to China, many so-called experts were telling us that the communist nation wouldn't dare kill their golden goose. Granted, it took a few decades to quell the basic hallmarks of a free society, but this week pretty much sealed the deal. Apple Daily, the wealthy island's last remaining pro-democracy newspaper, has been killed. It began with the (second) jailing of the paper's majority owner, Jimmy Lai. Then, Hong Kong's puppet regime froze the company's assets and seized its journalists' computers. The final straw was the arrest of two top executives under a new national security law Beijing imposed on the island to stifle dissent. Following that move, Apple Daily reported that both its print edition and website would cease operations. It is the beginning of a full-scale collapse of freedom in Hong Kong, which begs the question: how much longer can Taiwan remain a free country? Furthermore, what will the United States, which is bound by agreement to protect the nation from Chinese attack, do when the inevitable begins to unfold. America wouldn't have dreamed about accepting wave after wave of goods-laden shipping containers from the Soviet Union during the Cold War, yet we are funding the insatiable appetite of Communist China, and its dreams of global domination, by welcoming in some $500 billion per year of goods from that country, even though China only imports around $130 billion per year of US goods. This situation must change. If US companies are unwilling to break the deadly cycle and search elsewhere around the world for imports, they must be strongly coerced by the federal government to do so. Better yet, they should consider saving on the shipping costs by manufacturing domestically—or at least within the USMCA region.
Why do we care what Covid vaccine Philippine President Rodrigo Duterte chose to receive?
(11 May 2021) Roughly 20,000 American soldiers died defending the Philippines during World War II; about half were lost in battle while the other half succumbed to disease. The United States has enjoyed—actually, earned—an incredibly good relationship with the Southeast Asian country ever since General Douglas MacArthur uttered the infamous words in 1942: "I came through...and I shall return." To say that the Philippines sits in an important region of the world is an understatement. About one-fifth of global trade passes through the South China Sea, and trillions of dollars’ worth of oil and gas resources reside beneath its waves. The US military regularly patrols the region, with the Theodore Roosevelt and Nimitz Carrier Strike Groups conducting joint exercises in the waters this past February. China has continued to make outrageous claims on enormous swaths of the South China Sea—as shown by the red dashed line on the accompanying map—much to the consternation of its neighbors in the region. Now, the communist nation seems to be strongly wooing the mercurial and dictatorial leader of the Philippines, Rodrigo Duterte. The latest sign of the love affair came with Duterte’s decision to receive the underwhelming Chinese Covid vaccine known as Sinovac. Recent results from Brazil show a 50% effectiveness rate for the Chinese product. The Philippines’ Covid rate is the second highest in Southeast Asia, behind only Indonesia. While the choice of a vaccine is certainly anecdotal (though he did also praise Russia’s near-comical vaccine, Sputnik V), there is little doubt that Duterte is an iron-fisted leader who is on the outs with the United States right now, and that China would love to count on him as an ally in the region. The South China Sea seems to be quickly replacing the Persian Gulf as the most troublesome hot spot in the world. Outside of the Philippines, all other nations in the region have serious disagreements with China. That nation’s ham-handed approach to diplomacy will not serve them well over the coming years, but more countries need to follow Australia’s lead and refuse to be bullied by the ruling Communist Party of China. America, through its military presence in the region, must make it clear that a massive land grab by fiat is unacceptable.
(11 May 2021) Roughly 20,000 American soldiers died defending the Philippines during World War II; about half were lost in battle while the other half succumbed to disease. The United States has enjoyed—actually, earned—an incredibly good relationship with the Southeast Asian country ever since General Douglas MacArthur uttered the infamous words in 1942: "I came through...and I shall return." To say that the Philippines sits in an important region of the world is an understatement. About one-fifth of global trade passes through the South China Sea, and trillions of dollars’ worth of oil and gas resources reside beneath its waves. The US military regularly patrols the region, with the Theodore Roosevelt and Nimitz Carrier Strike Groups conducting joint exercises in the waters this past February. China has continued to make outrageous claims on enormous swaths of the South China Sea—as shown by the red dashed line on the accompanying map—much to the consternation of its neighbors in the region. Now, the communist nation seems to be strongly wooing the mercurial and dictatorial leader of the Philippines, Rodrigo Duterte. The latest sign of the love affair came with Duterte’s decision to receive the underwhelming Chinese Covid vaccine known as Sinovac. Recent results from Brazil show a 50% effectiveness rate for the Chinese product. The Philippines’ Covid rate is the second highest in Southeast Asia, behind only Indonesia. While the choice of a vaccine is certainly anecdotal (though he did also praise Russia’s near-comical vaccine, Sputnik V), there is little doubt that Duterte is an iron-fisted leader who is on the outs with the United States right now, and that China would love to count on him as an ally in the region. The South China Sea seems to be quickly replacing the Persian Gulf as the most troublesome hot spot in the world. Outside of the Philippines, all other nations in the region have serious disagreements with China. That nation’s ham-handed approach to diplomacy will not serve them well over the coming years, but more countries need to follow Australia’s lead and refuse to be bullied by the ruling Communist Party of China. America, through its military presence in the region, must make it clear that a massive land grab by fiat is unacceptable.
In a refreshing move, Western companies are finally speaking out against China's horrendous human rights abuses
(29 Mar 2021) In the current zeitgeist, many large American companies seem to have no problem wading into domestic politics—a taboo policy until quite recently. Now, in a refreshing move, some surprising players are finally willing to shine a light on the human rights abuses committed by the Communist Party of China. The largest footwear and athletic apparel brand in the world, Nike (NKE $133), saw its shares take a hit last week after the company denounced the forced labor of Chinese Uyghers and other ethnic minorities throughout various parts of China. Swedish fashion conglomerate H&M (HMRZF $24) announced that it would stop buying cotton from the Xinjiang region of northwest China after confirmed reports of forced labor. Burberry, Adidas, and New Balance have issued similar statements condemning the conditions. In another refreshing move, the governments of the EU, the UK, the US, and Canada jointly issued a statement denouncing the treatment of minorities in China. Now, as could be expected, calls to boycott Nike and H&M have sprung up across China. As the communist party controls virtually every aspect of media—to include social media—within China, the boycotts could have been easily predicted. How badly could these companies be hurt by a boycott? Considering that 36% of Nike's production and 22% of the company's sales emanate from China, there will be some pain felt. However, this should serve as an excellent wake up call for organizations which have become overly reliant on one closed society's cheap labor and growing middle class. Perhaps they will now consider China's more open-society neighbors to the south and east as a location for new plants and for new sources of revenue. It has been widely reported that China is turning more towards Russia and North Korea as it faces ever-increasing blowback for its unacceptable actions. That shouldn't come as a surprise, considering the similar nature of all three governments. The importance of US leadership in building an international alliance against human rights atrocities cannot be overstated. As the world's largest economy, America must counter China's Belt and Road Initiative (BRI), which will serve as a spreader for these practices, by building stronger economic and political alliances with countries around the world instead of acting unilaterally.
(29 Mar 2021) In the current zeitgeist, many large American companies seem to have no problem wading into domestic politics—a taboo policy until quite recently. Now, in a refreshing move, some surprising players are finally willing to shine a light on the human rights abuses committed by the Communist Party of China. The largest footwear and athletic apparel brand in the world, Nike (NKE $133), saw its shares take a hit last week after the company denounced the forced labor of Chinese Uyghers and other ethnic minorities throughout various parts of China. Swedish fashion conglomerate H&M (HMRZF $24) announced that it would stop buying cotton from the Xinjiang region of northwest China after confirmed reports of forced labor. Burberry, Adidas, and New Balance have issued similar statements condemning the conditions. In another refreshing move, the governments of the EU, the UK, the US, and Canada jointly issued a statement denouncing the treatment of minorities in China. Now, as could be expected, calls to boycott Nike and H&M have sprung up across China. As the communist party controls virtually every aspect of media—to include social media—within China, the boycotts could have been easily predicted. How badly could these companies be hurt by a boycott? Considering that 36% of Nike's production and 22% of the company's sales emanate from China, there will be some pain felt. However, this should serve as an excellent wake up call for organizations which have become overly reliant on one closed society's cheap labor and growing middle class. Perhaps they will now consider China's more open-society neighbors to the south and east as a location for new plants and for new sources of revenue. It has been widely reported that China is turning more towards Russia and North Korea as it faces ever-increasing blowback for its unacceptable actions. That shouldn't come as a surprise, considering the similar nature of all three governments. The importance of US leadership in building an international alliance against human rights atrocities cannot be overstated. As the world's largest economy, America must counter China's Belt and Road Initiative (BRI), which will serve as a spreader for these practices, by building stronger economic and political alliances with countries around the world instead of acting unilaterally.
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US/
China Relations |
The new administration took a tough stance with China in first official meeting; now, let's look for continuity
(19 Mar 2021) Thankfully, John Kerry was nowhere near the Captain Cook Hotel in Anchorage this past week. The first official meeting between the Biden administration and the Communist Party of China was anything but a love-fest, and that gives us encouragement that the US won't get rolled over the next four years. In what was to be a brief photo-op, US Secretary of State Anthony Blinken and US National Security Advisor Jake Sullivan gave their Chinese counterparts an earful, expressing concern over issues from Hong Kong to questionable trade practices to cybersecurity. Secretary Blinken: "...the US relationship with China will be competitive where it should be, collaborative where it can be, adversarial where it must be." He went on to express the concerns raised (about China) from allies such as Japan and South Korea: "I have to tell you what I'm hearing is very different from what you described." Surprisingly stark language for an audience that wanted to hear sycophantic praise for the Chinese people and the ruling communist party. The frustration was revealed in a response by Chinese Director of the Central Foreign Affairs Commission, Yang Jiechi: "...the United States does not have the qualification to say that it wants to speak to China from a position of strength...this is not the way to deal with the Chinese people." A nerve was touched, to put it mildly. Of course, what really matters is how the Biden administration actually deals with the communist nation going forward. Nonetheless, neither the spirit of Neville Chamberlain nor John Kerry seemed to be present in the room—which gives us quite a bit of comfort. One of our biggest beefs with the Trump administration was the lack of willingness to join with our allies in a united front against unacceptable Chinese behavior. We are virtually certain that will not be the case with the new administration. China also made a major miscalculation by unleashing the massive cyber strike against Microsoft so early in Biden's term, leaving him almost no choice but to take a tough stance against our major global nemesis. Russia is trying to join forces with China against the US on several fronts, such as a planned Sino-Russian moon base, but Russia remains a shell of its former self, with an economy fueled—no pun intended—overwhelmingly by fossil fuels. A full 82% of the world's population does not reside in China, and a majority of that percentage hold animosity for—or, at least, a deep mistrust of—China. The US must work to garner a true global coalition against the CCP's global ambitions. We can't think of any more important strategic US focus over the coming years. |
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China
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In hopeful sign, Apple is reportedly shifting some production from China to Vietnam
(02 Nov 2020) Country Risk: the uncertainty associated with investing in a particular country and the degree to which that uncertainty can lead to losses for stakeholders. This risk can be mitigated by assuring a company is not overly reliant on one particular country, especially those with undemocratic forms of government. This is Economics 101, yet how many management teams flouted this basic lesson because of the glittering jewel they saw in China's 1.3 billion potential consumers? We can't undo the past, but we can hold these companies accountable. In a hopeful sign that the zeitgeist is shifting, Apple (AAPL $123) is reportedly moving iPad production out of China and into Vietnam—a country with a large degree of animosity towards the communist state. More specifically, key Apple supplier Foxconn is shifting the production—both for iPads and some MacBooks—from their Chinese facilities to the Vietnamese factories they began building back in 2007. The company is setting up new assembly lines for both the tablets and the laptops at their plant in Bac Giang, a northeastern province of Vietnam, "at the request of Apple." Other than that admission, both companies are mum on the details. In yet another hopeful sign, Apple is planning a $1 billion spend to expand its manufacturing presence in the democratic country of India. For its part, Foxconn is looking at building a new set of plants in Mexico. Slowly but surely, companies are waking up to the level of country risk involved with communist China. If the Western world can actually present a united front, the China 2025 plan may be dealt a hefty blow. |
US orders China to close its consulate in Houston due to espionage
(23 Jul 2020) For a generation, China has built its economic might through the theft of intellectual property. If there has been one prevailing geopolitical theme in the United States over the past three years, it has been the effort to stop this illegal practice. The latest salvo came via an order for China to close its consulate office in Houston—by 4 p.m. Friday—due to charges of economic espionage. The heart of this particular case revolves around Chinese theft of US medical research into Covid-19 vaccines. Of the five Chinese consulates in the US, the Houston office, due to its proximity to US biomedical research facilities, had the largest number of ongoing medical espionage cases, according to both the FBI and the US Department of State. The consulate has also been providing falsified visas to Chinese researchers who would subsequently gain employment at university and corporate labs for the purpose of espionage. Many of these researchers have been identified by the FBI as members of the People's Liberation Army. China expressed outrage at the ordered closure, and promised retaliation. There is little doubt, however, as to which side has the most to lose in a battle of consulate shutdowns.
(23 Jul 2020) For a generation, China has built its economic might through the theft of intellectual property. If there has been one prevailing geopolitical theme in the United States over the past three years, it has been the effort to stop this illegal practice. The latest salvo came via an order for China to close its consulate office in Houston—by 4 p.m. Friday—due to charges of economic espionage. The heart of this particular case revolves around Chinese theft of US medical research into Covid-19 vaccines. Of the five Chinese consulates in the US, the Houston office, due to its proximity to US biomedical research facilities, had the largest number of ongoing medical espionage cases, according to both the FBI and the US Department of State. The consulate has also been providing falsified visas to Chinese researchers who would subsequently gain employment at university and corporate labs for the purpose of espionage. Many of these researchers have been identified by the FBI as members of the People's Liberation Army. China expressed outrage at the ordered closure, and promised retaliation. There is little doubt, however, as to which side has the most to lose in a battle of consulate shutdowns.
Yet another Western democracy bans Huawei in its 5G buildout
(14 Jul 2020) Drawing the ire of the US administration, the British government—under the leadership of conservative Boris Johnson—refused to buckle to requests that it ban China's Huawei Technologies from assisting in the country's massive 5G buildout plan. Then came the pandemic, wreaking havoc on the world due to Chinese stonewalling and silence. In the aftermath of the avoidable global disaster, the British government has done an about-face, joining the United States, Australia, New Zealand, Japan, and Taiwan—representing one-third of the world's GDP—in banning the company and its technology. While a number of European countries, along with the Canadian government of Justin Trudeau, remain on the fence, the US argument that Huawei is a Chinese Trojan Horse continues to gain traction. And could anyone with a rational mind actually believe that this Chinese entity would not be used to steal trade secrets from and spy on the Western world? Who remembers the enormous Equifax breach in which 150 million Americans had their personal data—to include social security and driver's license numbers—stolen? (A reason, by the way, that every American should have some form of ID theft protection—this information will eventually be used to harm the US.) Three high-ranking members of the Chinese military were identified as the ringleaders. China has an insatiable appetite for stolen intellectual property and has proven it will do whatever it takes to dominate on the world scene. The sooner that other Western democracies—like Germany and France—realize this, the better prepared they will be to fight this increasingly-dangerous global menace.
(14 Jul 2020) Drawing the ire of the US administration, the British government—under the leadership of conservative Boris Johnson—refused to buckle to requests that it ban China's Huawei Technologies from assisting in the country's massive 5G buildout plan. Then came the pandemic, wreaking havoc on the world due to Chinese stonewalling and silence. In the aftermath of the avoidable global disaster, the British government has done an about-face, joining the United States, Australia, New Zealand, Japan, and Taiwan—representing one-third of the world's GDP—in banning the company and its technology. While a number of European countries, along with the Canadian government of Justin Trudeau, remain on the fence, the US argument that Huawei is a Chinese Trojan Horse continues to gain traction. And could anyone with a rational mind actually believe that this Chinese entity would not be used to steal trade secrets from and spy on the Western world? Who remembers the enormous Equifax breach in which 150 million Americans had their personal data—to include social security and driver's license numbers—stolen? (A reason, by the way, that every American should have some form of ID theft protection—this information will eventually be used to harm the US.) Three high-ranking members of the Chinese military were identified as the ringleaders. China has an insatiable appetite for stolen intellectual property and has proven it will do whatever it takes to dominate on the world scene. The sooner that other Western democracies—like Germany and France—realize this, the better prepared they will be to fight this increasingly-dangerous global menace.
North Korea cuts ties with South in effort to break US/Korean alliance
(09 Jun 2020) We knew it was too good to believe that the pot-bellied dictator of North Korea, Kim Jong-un, had actually assumed room temperature. Not only is he still alive, he is back to his old mercurial self. North Korea announced that it was shutting down a joint liaison office it just opened with the South back in 2018, and has turned off the "hotline" established between the two nations designed to avoid catastrophic incidents from arising. Kim claims these steps were simply in response to anti-government leaflets coming across the border from the south via balloons, but his tactics are clear: force President Moon Jae-in to sever ties with the US. His strategic goal is also crystal clear: one unified Korea, with him at the helm. The juxtaposition of the economic might of South Korea and the abject blight of North Korea is staggering to look at. Sadly, in a similar way that China believed it could simply absorb the golden goose that was Hong Kong, Kim believes that this capitalism-built wealth will be his for the taking. In reality, of course, South Koreans would end up living more like their impoverished neighbors to the north than the other way around. For his part, despite the fact that he is rather dovish, Moon is not about to sever his strong ties with the West. It doesn't help Pyongyang's cause when Kim's minions refuse to answer calls made from Seoul on the military hotline—an incident which occurred this past Tuesday. (UPDATE: On Tuesday, North Korea blew up the inter-Korean liaison office on its side of the border, and is now threatening to send troops into some areas of the Demilitarized Zone (DMZ) separating the two sides of the peninsula.)
(09 Jun 2020) We knew it was too good to believe that the pot-bellied dictator of North Korea, Kim Jong-un, had actually assumed room temperature. Not only is he still alive, he is back to his old mercurial self. North Korea announced that it was shutting down a joint liaison office it just opened with the South back in 2018, and has turned off the "hotline" established between the two nations designed to avoid catastrophic incidents from arising. Kim claims these steps were simply in response to anti-government leaflets coming across the border from the south via balloons, but his tactics are clear: force President Moon Jae-in to sever ties with the US. His strategic goal is also crystal clear: one unified Korea, with him at the helm. The juxtaposition of the economic might of South Korea and the abject blight of North Korea is staggering to look at. Sadly, in a similar way that China believed it could simply absorb the golden goose that was Hong Kong, Kim believes that this capitalism-built wealth will be his for the taking. In reality, of course, South Koreans would end up living more like their impoverished neighbors to the north than the other way around. For his part, despite the fact that he is rather dovish, Moon is not about to sever his strong ties with the West. It doesn't help Pyongyang's cause when Kim's minions refuse to answer calls made from Seoul on the military hotline—an incident which occurred this past Tuesday. (UPDATE: On Tuesday, North Korea blew up the inter-Korean liaison office on its side of the border, and is now threatening to send troops into some areas of the Demilitarized Zone (DMZ) separating the two sides of the peninsula.)
China faces new reality of falling orders from overseas customers
(01 Jun 2020) We have talked ad nauseam about China's growth fallacy, supported by the dolts in the media—the idea that the communist nation's growth trajectory would maintain its double-digit annual clip. We knew it was a matter of time before those sky-high GDP rates came falling back to earth. What we didn't foresee was a pandemic emanating from the country adding downward momentum to the trip. Despite that country's boast that it was coming back online with government-run efficiency (OK, that we do buy), there is a major cog in the machinery: a dearth of new international orders. While the new-export-orders subindex of China's "official" (meaning padded) PMI report showed improvement from 33.5 in April to 35.3 in May, that is still a horrendously-bad number. Keep in mind that any number above 50 reflects economic expansion, while sub-50 represents contraction. Here's the question only time will answer: how much of the contraction is simply due to other countries still trying to shake off the economic effects of the pandemic, and how much is due to countries attempting to source their goods from elsewhere. Granted, it would be rather difficult to undertake the latter effort on the fly, but we get the idea that a better management of country risk will force importers to begin looking outside of mainland China for more and more of their goods.
(01 Jun 2020) We have talked ad nauseam about China's growth fallacy, supported by the dolts in the media—the idea that the communist nation's growth trajectory would maintain its double-digit annual clip. We knew it was a matter of time before those sky-high GDP rates came falling back to earth. What we didn't foresee was a pandemic emanating from the country adding downward momentum to the trip. Despite that country's boast that it was coming back online with government-run efficiency (OK, that we do buy), there is a major cog in the machinery: a dearth of new international orders. While the new-export-orders subindex of China's "official" (meaning padded) PMI report showed improvement from 33.5 in April to 35.3 in May, that is still a horrendously-bad number. Keep in mind that any number above 50 reflects economic expansion, while sub-50 represents contraction. Here's the question only time will answer: how much of the contraction is simply due to other countries still trying to shake off the economic effects of the pandemic, and how much is due to countries attempting to source their goods from elsewhere. Granted, it would be rather difficult to undertake the latter effort on the fly, but we get the idea that a better management of country risk will force importers to begin looking outside of mainland China for more and more of their goods.
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LK
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Luckin Coffee is the poster child for Chinese firms on US exchanges
(21 May 2020) We received several calls about the IPO precisely one year ago. A Chinese coffee house that was going to decimate Starbuck's (SBUX $78) in the country of 1.4 billion people was about to go public. Our recommendation about Luckin Coffee (LK $2-$3-$51)? Don't touch it. We peruse financial reports on US companies with a critical eye, always wondering what level of obfuscation might be baked in to bury the real story. With companies based in mainland China, we just assume we are being hoodwinked. Luckin came out of the gate to great fanfare, rising to around $20 per share before dropping to $15 a few days later. Investors seemed to sense a bargain at $15, and pumped the shares up to $51.38 by January of 2020. Then the wheels came off the wagon. It was revealed that senior management at the $12 billion firm had been cooking the books all along. Shares plummeted. Then came the threat of delisting by Nasdaq, Inc., which ultimately led to trading being suspended. When trading resumed, shareholders headed for the exits, driving shares down from $25 to $2.58, as Nasdaq confirmed the delisting plans. Ultimately, any buyer who did not get out will see the value of their investment go to zero. Investors shouldn't feel too bad about their purchase, however, as they are in good company: Goldman Sachs (GS) admitted that an entity controlled by Luckin Chairman Charles Zhengyao had defaulted on a $518 million margin loan. Between their WeWork and Luckin Coffee investments, it has been a rough year for Goldman. As for investors, let this be a valuable lesson with respect to buying shares in Chinese companies, even if they are listed on US exchanges. |
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Chinese misinformation can't hide fact that their economy is reeling
(17 Apr 2020) Our first response was anger. China, the country responsible for a global recession and tens of trillions of dollars lost in a matter of months, was boasting that their economy was nearly fully recovered from the pandemic. After that initial emotional response, however, we began looking at the facts; facts which China would never admit to. GDP: China's economy shrank 6.8% (at least) in Q1—the country's first contraction in decades, and the worst performance since it began reporting GDP data back in 1992. Retail sales: dropped 16% in March. Exports: fell 6.6% in March, while imports only fell 0.9%—expect the export numbers to look a lot worse in Q2 due to the economic pain China foisted upon the world. The WTO reported that 2020 could reflect the worst collapse in international trade since the Great Depression, and no country would be hurt more than China by that condition. Loss of global prestige: China has taken no responsibility for the virus which originated in Wuhan, even floating a trial balloon that it emanated from a DoD lab in the US. The worldwide outrage at China over the virus will manifest itself in a number of ways, including a review of trade dependence on the nation. China claims that it is back up and running, with even Wuhan factories humming along at full speed. Deep inside the bowels of the Communist Party of China, however, there is angst and finger-pointing going on, with even General Secretary Xi Jinping feeling the heat. |
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China's divorce rate skyrockets as quarantine is lifted. (31 Mar 2020) Last year, there were approximately four million divorce cases filed in China. While the data are only compiled and published once per year in the country, huge lines have been forming outside of divorce lawyers' offices around formerly-quarantined regions of the country, indicating the four million mark will be eclipsed in 2020. Approximately 75% of the cases being filed are initiated by women. In quintessential communist style, judges in the country have final say over whether or not permission will be granted for a divorce application to move forward, but if a couple initiates a second filing (assuming the first was thrown out), the judge normally grants the request. Ironically, in a nation of 1.4 billion citizens, the Chinese government is encouraging couples to not only stay together, but to have more children. The country's birthrate in 2019 was its lowest since the founding of the People's Republic of China in 1949, while the percentage of non-working elderly continues to grow. Also in 2019, the average household income in China was around $4,500 per year.
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Communist China dealt another political blow as Taiwan elections turn out a lot like the Hong Kong elections. (12 Jan 2020) Under two months ago, the Hong Kong electorate overwhelmingly voted for pro-democracy candidates to fill seats in the island's legislature, sending shock waves through the Communist Party of China (CPC). This past weekend, voters in Taiwan sent a similar message to Beijing. A staunch defender of Taiwan's freedom from the CPC, President Tsai Ing-wen won re-election in a historic landslide, badly setting back China's aims to gain more control over the island. 8.2 million voters, almost precisely one-third of the island's total population, voted for Ms. Tsai, the largest vote ever recorded in Taiwan. China had embarked on a stealthy campaign to unseat Tsai, using tactics such as military drills in the waters around the island, and stronger control of travel between the mainland and Taiwan. It appears these tactics backfired badly, with increased sympathy from the Taiwanese people to the plight of pro-democracy demonstrators in Hong Kong. It also didn't help that Beijing reiterated its claim that Taiwan is part of its territory. China has pushed for its so-called "one country, two systems" framework to be adopted by Taiwan, but the citizens are getting a first-hand look at the illusion of that promise through what is going on in Hong Kong. In a speech following her landslide win, Tsai commented on the special relationship Taiwan has with the United States—comments that probably enraged many in the CPC. The Communist Chinese Party had already internalized what its own highly-political press corps was spewing, backed up by the dupes in the American press corps: that China's rise to the leading economic power in the world was already set in stone. Reports of that rise, as the old joke goes, have been highly exaggerated.
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Hong
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The communist party just got walloped in Hong Kong, creating another massive problem for Xi but a nice byproduct for the US. (26 Nov 2019) By any measure, it was a landslide. The young, energetic, pro-democracy activists in Hong Kong completely pounded virtually all of the Chinese Communist Party's candidates in the elections which just took place across Hong Kong. If the elections were meant to be a barometer, the measured pressure was off the charts. With a record voter turnout of 71%—double the number from four years ago, pro-democracy candidates won 90% of the 452 district council seats. What the people of Hong Kong are demanding is clear: China must stick to its 1997 promise of "one country, two systems." A promise we never believed they would keep. The elections may have had a positive, unintended consequence for the US. In a phone call with US trade reps, Chinese officials finally put the issue of intellectual property on the table. In other words, with increased pressure from their southern border, they may finally be willing to complete the first leg of a trade deal. The US markets liked that news. While the election results in Hong Kong were fantastic, the Communist Party of China will never capitulate. The best we can hope for is a stalemate akin to a weakened version of China vs Taiwan. If that condition is unacceptable to Beijing, they will take actions which will drive even more capital away from their former golden goose.
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Hong
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Senate passes Hong Kong support bill, enraging the communist Chinese government. (20 Nov 2019) Just as it appeared likely that at least part of a trade deal with China was going to get done, new events continue to foil the effort. The latest: the United States Senate unanimously passed the Hong Kong Human Rights and Democracy Act, a bill designed to show support for Hong Kong's protestation of China's infiltration into the Special Administrative Region. The House already passed a similar bill, but the two chambers must cobble together a piece of compromise legislation before it can be sent to the White House for presidential approval. Whether that hurdle can be jumped is debatable, especially with the House myopically focused on impeachment, but even the specter of a final bill has enraged Beijing. While both sides have publicly claimed that the two issues, trade and Hong Kong, are separate, this is such a hot-button topic for China that the two are almost certainly intertwined. Yet another roadblock in the way. That being said, the Senate did the right thing by passing the bill in a bipartisan manner. At least the two political parties can agree on something. China can do all of the saber-rattling it likes, the country is truly being hurt by this trade war. They will never give up on controlling Hong Kong, however, and that issue will not go away—trade deal or not.
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Hong
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Is Hong Kong suddenly becoming the biggest threat to the markets? (12 Aug 2019) It has to be one of the most predictable, slow-moving train wrecks in history. When the UK handed over control of the glittering economic jewel that is Hong Kong to the communist country of China, its future became set in stone. A gigantic clash of cultures was inevitable. Now, with pro-democracy demonstrators shutting down the Hong Kong airport, one of the busiest in the world, they are almost daring China's communist leaders to respond with force. Not only are these freedom fighters impeding the flow of cash from this vibrant economic region, they are also giving China's image a black eye, and the latter will not be tolerated by a country which controls its false narratives with an iron fist. No matter how this most recent protest at the airport ends, the battles are only going to intensify. And when that happens, expect some ugly volatility in the markets. Official minions of the Chinese government are already using the word "terrorism" to describe some of the protesters' actions. This language is choreographed, designed to lend some warped sense of credibility to the Chinese military's potential moves in the region. While investors have been focused on the tattered state of US/China trade talks, this powder keg could steal the headline on any given day. This geopolitical issue should be factored into every investor's risk management matrix.
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China
GDP |
Despite massive government stimulus, China's GDP hits weakest level in 27 years. (16 Jul 2019) When you are a communist state, you can do whatever you like with little pushback from the media (which you control) or the citizenry (which you also control). With this carte blanche, China has built a mountain of debt in a vain attempt to stimulate its economy. How much debt? Try $5.2 trillion, or nearly one-half the country's GDP. Despite these efforts, however, China just recorded its slowest level of growth since 1992. Granted, the 6.2% annualized rate recorded in Q2 seems enviable, but growth rates for an emerging economy always appear exacerbated when compared to a developed economy. Imagine tossing a lighter baseball in the air (emerging economy) versus a dense bowling ball (developed economy), and this begins to make sense. While our graph only goes back to the first quarter of 2011, we have to travel back to Q1 of 1992—the earliest data on record—to find an equivalent rate of growth. Clearly, the trade war with the US has been the catalyst for the most recent drop, but China has been propping up its economy on an unsustainable river of new debt; the trade war merely ripped up the pristine veneer covering the rotted wood. Furthermore, despite the inevitable end to the trade war, the damage has been done—companies from around the world continue to diversify their Asian operations to countries with more business-friendly forms of government. Emerging market economies in East and Southeast Asia, outside of China, continue to look extremely promising moving forward. When purchasing an emerging markets ETF, be sure and check its exposure to China. For example, two of the largest emerging markets ETFs, VWO and EEM, each have one-third of their holdings emanating from China.
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Hong
Kong |
Hong Kong protests grow as pro-Beijing leader Carrie Lam pursues extradition legislation. (12 Jun 2019) It has always been our contention that Hong Kong, which transformed itself into a major economic hub while under British control, should have ultimately become a sovereign nation. The gigantic clash of cultures which began when China took control of the region in 1997 was inevitable, and it is far from over. Twenty years after Hong Kong became a Special Administrative Region of the People's Republic of China, Beijing puppet Carrie Lam was installed as Hong Kong's chief executive. There was no vote among the seven million residents of Hong Kong; a simply majority of an election committee handed her the job. Now, true to form, Lam is pushing legislation which would allow for the extradition of residents to mainland China, further eroding the "one country, two systems" facade which is currently in place. Large crowds of protesters blocked roads leading to the Legislative Council, which is set to take up the extradition proposal, which in turn led to police in riot gear lobbing tear gas and firing rubber bullets at the protesters. In the end, the legislation will be put in place, as China ultimately controls this region, despite their false promises of autonomy. The citizens of Hong Kong, however, will not go quietly into the night. Will Hong Kong ultimately become the thorn in the side of China that is Taiwan? Probably not to that extent—Taiwan is, after all, a sovereign state, despite China's argument to the contrary. Nonetheless, the Hong Kong issue will continue to haunt China into the foreseeable future.
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China
GDP |
China's slowing growth and a great lesson in how the media creates a false narrative. As recently as a few years ago, we were inundated with stories in the US media (and, of course, within the state-controlled Chinese media) of how China would soon overtake the United States as the world's number one economic superpower. Funny how those stories have disappeared. Here's the dirty little secret: If you take a look at real GDP growth within the Chinese economy, there have been many years since 1990 in which the number did, indeed, grow at a double-digit clip; however, the media pulled a fast one by extrapolating that double-digit growth into forward years, and then calculating the point on the graph at which the Chinese line broke through the US line to the upside. Story after story was written based on this faulty premise. Of course an emerging market—by definition—can move faster than a developed economy the size of America's. However, as the numbers get larger, it is simply impossible to maintain that growth rate. And so, here we are. Shockingly (not), China just recorded its slowest year of growth since 1990. Furthermore, 2018's 6.6% rate is expected to continue dropping in subsequent years. Now, if the press could turn their attention to graphs which should concern Americans, like the decimation of the "Social Security trust fund" (there really isn't one) or the burgeoning level of US government debt, they would actually be providing a service to be proud of. China's problems are deeper than the numerical inability to maintain a double-digit growth rate. Between internal demographic problems and up-and-coming emerging market challengers like India, their fastest growth years are in the rear-view mirror.
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Koreas
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Hack gives Li'l Kim information on nearly 1,000 defectors in South Korea. (28 Dec 2018) When dealing with a mentally unstable, mercurial dictator who happens to be the leader of a socialist state, there really is only one strategic plan: containment and constant pressure at all levels. There can never be a lasting deal with a madman. We don't doubt that, for a brief tract of time, Kim Jong-un liked Donald Trump, and was willing to make a deal with the West, but that time is over. He will need to feign overtures to end the economic containment of his country, but he will never give up his war-fighting capabilities or end his electronic warfare against the civilized world. With respect to the latter, the South Korean Unification Ministry announced that a malware hack has allowed the release of the names, birth dates, and addresses of 997 North Koreans who had previously defected to the South. The Ministry, whose raison d'être is to support a "one Korea" solution, apologized for the lapse and has notified the defectors. That should comfort them (considering the fact that Kim's half-brother was killed in Kuala Lumpur). Investors need to understand this point: there will be times at which it appears all is relatively calm on the Korean peninsula, but that is a mirage. South Korea has a vibrant economy which happens to be the 11th largest in the world, but North Korean spies permeate the fabric of society in the South. The theft of intellectual property by the North on the South rivals only the IP theft of American technology by the Chinese. Fortunately (or unfortunately for the poor souls who live in the North), Li'l Kim doesn't have the economic infrastructure to do much with that technology—except undermine the South Korean economy as much as possible.
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In long overdue move, the US just ratcheted up the fight on Chinese-sponsored economic espionage. (21 Dec 2018) One of the (few) bright spots we have anticipated for the markets in the coming year revolves around a US/China trade deal getting done. They will never admit it, but China desperately needs a deal, as their economy is suffering greatly. At first glance, Thursday's actions by the FBI seemed to throw a wrench into the works. The agency brought forth criminal charges against two Chinese citizens for their role in a state-sponsored espionage campaign against US government agencies and American companies. The two were part of a group labeled APT10 by US intelligence officials, with the acronym standing for "advanced persistent threats." This has been an ongoing effort to steal sensitive and highly technical data from such industries as aerospace, banking and finance, healthcare, automotive, and mining. Most importantly, these charges came after a coordinated effort between the US, Canada, Japan, and the UK. While there is an Interpol issue out for the arrest of these two individuals, there is virtually no chance they will travel outside of the safety of China and risk arrest. It should be noted that the Chinese have audaciously stepped up their intellectual property theft efforts since they signed a pact with then-President Obama back in 2015 promising to end such behavior. One thing is certain, no matter what deal they sign to ease their economic pain, they will cheat (on any deal) to the greatest possible degree. Some deal will probably be hammered out, and most or all of the tariffs will be lifted, but it won't take long for China to get caught hacking, once again, into US systems. The best bet, besides the legal efforts, will be for the US to continue development of its quantum computing program. Potential winners in this new "arms" race will be IBM, Google, Microsoft, and Intel.
The following story has been reprinted from the upcoming issue of The Penn Wealth Report...
We will have a trade deal with China, but they still plan world domination
(14 Dec 2018) It was a data breach of massive proportions. Marriott International (MAR) just reported on the hack at its Starwood chain this past September, but the incident, which compromised the personal information of up to 500 million hotel guests, has been going on since 2014. Now, US officials say they have clear evidence that this egregious attack on an American company emanated from the Chinese Ministry of State Security.
Ironically, back in 2015 President Barack Obama forged an agreement with President Xi of China which was touted as the vehicle that would end such state sponsorship of hacking and intellectual property theft. Evidence shows that the espionage efforts only picked up steam after the agreement was reached. What does that say about China’s intent going forward?
Fast forward to this past week, and we have fresh evidence that government-sponsored Chinese hackers (if not direct Chinese military personnel) have been breaching the computer systems of US Navy contractors in an effort to steal highly-sensitive data on missile systems, ship maintenance information, and personnel data. This as China has called for a trade truce with the United States.
As a “peace offering,” China has signaled it will delay or change altogether its “Made in China 2025” initiative, a 10-year plan unveiled in 2015 designed to assure that the country’s “core materials” (think high-tech equipment and products) consist of at least 70% Chinese-made internal parts. In other words, they wouldn’t pull a US-like move and rely on another country for high-tech components. One thing is certain: China can say whatever they want, but they will never give up their plan to become the world’s leading economic (and, ultimately, military) superpower.
Here’s what the United States can do about it: make them reach that point on their own instead of on the back of American technological superiority via the forced transfer of technology. They knew exactly what they were doing when they signed the agreement with Obama, and they had no intention of slowing down their systematic theft of US technology.
The market downturn began as a response to doubts over a trade deal with China getting done, but it has now morphed into something deeper: a concern that China’s economy resembles a house of cards much more than the press (ours and theirs) wants us to believe. Forced to survive on their own, without the intellectual property theft, 2025 might just become 2125.
Additionally, China does not exist in a low-wage vacuum. A US company can just as easily have products manufactured in Vietnam, or India, or Sri Lanka. That appears to be something that the Communist Party of China did not take into consideration.
Despite what the press may report, China needs a comprehensive trade deal more than the US does, though certainly the US markets want to see one cobbled together. The Chinese government will offer to play by international rules with respect to intellectual property, but the US must “trust but verify.” Meanwhile, look for other “Asia Developing” economies for the EM slice of your investment portfolio.
(14 Dec 2018) It was a data breach of massive proportions. Marriott International (MAR) just reported on the hack at its Starwood chain this past September, but the incident, which compromised the personal information of up to 500 million hotel guests, has been going on since 2014. Now, US officials say they have clear evidence that this egregious attack on an American company emanated from the Chinese Ministry of State Security.
Ironically, back in 2015 President Barack Obama forged an agreement with President Xi of China which was touted as the vehicle that would end such state sponsorship of hacking and intellectual property theft. Evidence shows that the espionage efforts only picked up steam after the agreement was reached. What does that say about China’s intent going forward?
Fast forward to this past week, and we have fresh evidence that government-sponsored Chinese hackers (if not direct Chinese military personnel) have been breaching the computer systems of US Navy contractors in an effort to steal highly-sensitive data on missile systems, ship maintenance information, and personnel data. This as China has called for a trade truce with the United States.
As a “peace offering,” China has signaled it will delay or change altogether its “Made in China 2025” initiative, a 10-year plan unveiled in 2015 designed to assure that the country’s “core materials” (think high-tech equipment and products) consist of at least 70% Chinese-made internal parts. In other words, they wouldn’t pull a US-like move and rely on another country for high-tech components. One thing is certain: China can say whatever they want, but they will never give up their plan to become the world’s leading economic (and, ultimately, military) superpower.
Here’s what the United States can do about it: make them reach that point on their own instead of on the back of American technological superiority via the forced transfer of technology. They knew exactly what they were doing when they signed the agreement with Obama, and they had no intention of slowing down their systematic theft of US technology.
The market downturn began as a response to doubts over a trade deal with China getting done, but it has now morphed into something deeper: a concern that China’s economy resembles a house of cards much more than the press (ours and theirs) wants us to believe. Forced to survive on their own, without the intellectual property theft, 2025 might just become 2125.
Additionally, China does not exist in a low-wage vacuum. A US company can just as easily have products manufactured in Vietnam, or India, or Sri Lanka. That appears to be something that the Communist Party of China did not take into consideration.
Despite what the press may report, China needs a comprehensive trade deal more than the US does, though certainly the US markets want to see one cobbled together. The Chinese government will offer to play by international rules with respect to intellectual property, but the US must “trust but verify.” Meanwhile, look for other “Asia Developing” economies for the EM slice of your investment portfolio.
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China
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Chinese stock market plummets 3% in one trading day. (18 Oct 2018) The Chinese government, via its state-controlled media, always plays offense with respect to the nation's economic stability and growth, but it's hard to spin Thursday's huge market loss as a positive. Fears and concerns over the trade war, national debt levels, and massive government infrastructure spending all conspired to spook investors out of Chinese stocks, sending the benchmark Shanghai Composite down just shy of 3% on the day. The Shanghai has lost one-quarter of its value since the start of the year, while the US benchmark S&P 500 is up 5% year-to-date.
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China
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Think China's debt load is too high? You don't know the half of it. (16 Oct 2018) There have been many alarming stories published over the past few years with respect to China’s unsustainable debt load, which threatens to quash the country’s steep growth trajectory. According to a report issued by S&P Global Ratings, conditions may be even more dire than known. As could be expected, the Communist Central Government in Beijing controls how much Chinese provinces and other local governments within the country can spend. To skirt these restrictions, however, these entities have been turning to local government financing vehicles, or LGFVs. These are off-balance sheet debt loads hidden from the world’s rating agencies, but they are very real, nonetheless. In the next issue of The Penn Wealth Report, we delve into China's real debt load, which could be double what the communist government is reporting.
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South
Korea |
US, South Korea finalize trade deal. The United States and South Korea held an official signing ceremony at the United Nations this week to celebrate a new trade deal, or at least a major revamp of the KORUS deal on the books between the two allies. Korea exports just over $10 billion more in goods and services each year to the United States than the US does to South Korea. This new trade deal is an attempt to rectify that situation. Under its terms, South Korea will now allow each American automaker to export 50,000 vehicles annually into the country which meet US—not South Korean—safety standards. A 25% tariff on Korean trucks coming to the US not only remains in place, it has been extended to 2041. With respect to steel, the Asian country agreed to slash its exports to the US by nearly one-third; in return, the country's steel exports no longer face the 25% tariff imposed on imports by the Administration. South Korea is currently the third-largest exporter of steel to the US. This was a nice win for both countries: the US will get a "more-level" playing field, while Moon Jae-in garnered more support in his efforts to mend ties with North Korea. After discussing the recent meeting between the two Korean leaders, President Trump announced that a follow-up meeting with Kim Jong-un will take place soon.
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Indo-Pacific
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US moves to counter China's 21st-century Silk Road program. (30 Jul 2018) China's Belt and Road Initiative (BRI), announced a few years ago, is designed to be the 21st-century version of the famed Silk Road—the ancient network of trade routes which connected East and West. BRI's trillion-dollar goal is to create a series of overlapping "belts" and shipping "roads" to give China dominance throughout an enormous region, spanning some 60 countries. Now, the US is looking to disrupt and counter the Chinese initiative. The Trump administration first reframed the strategy for the region by changing the term "Asia-Pacific" to "Indo-Pacific," focusing more on our allies in the region instead of simply accepting the former's China-centric connotation. Now, Secretary of State Mike Pompeo is set to announce a string of economic initiatives for the region focusing on energy, infrastructure, and the digital economy. Pompeo will present the new initiatives at a US Chamber of Commerce forum this week.
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North
Korea China |
Li'l Kim still thinks he can get away with subterfuge in North Korea, and his economy is paying the price. (23 Jul 2018) Based on the fact that pot-bellied dictator Kim Jong-un came to the negotiating table, US-led worldwide sanctions against North Korea have been working. Now, sadly, it appears that Kim thinks he can talk nice, continue to build up his arsenal, and fool the world into lifting the sanctions. China will certainly help him with the rouse, but the US isn't biting. New intelligence reports show that Li'l Kim continues to work on his nuclear arsenal, and that China is still illegally shipping energy to North Korea via ship-to-ship (STS) transfers. Japan's Ministry of Foreign Affairs has confirmed "probable" detection of such transfers in the East China Sea, a few hundred miles off the coast of Shanghai. Meanwhile, North Korea's economy continues to get battered from the sanctions. Gross domestic product (GDP) dropped by 3.5% in 2017 (the weakest in 20 years), and the Bank of Korea (BOK) said that the the full effect of sanctions on the country won't show up until we see the 2018 figures. Per capita income in North Korea is sitting at about $1,300 USD per person, which is roughly 5% of the $28,000 USD per capita income in South Korea.
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North
Korea |
President Trump, Kim Jong-un hold historic first meeting. President Donald Trump and North Korea's Kim Jong-un held a historic meeting in Singapore on Tuesday, and it appears as if it could lead to an enormous geopolitical win: the denuclearization of the Korean Peninsula. Certainly, it is just the beginning of a grand undertaking, but North Korea's dire economic state—thanks to the US-driven embargo—was the catalyst for Kim's promise to completely denuclearize. In return, President Trump agreed to halt joint US/South Korean military drills. Next to the signed initial agreement between the two leaders, the most promising news from the summit was that Secretary of State Mike Pompeo, who graduated first in his class at West Point and first in his class at the Harvard Law School, will be leading the US delegation as we head into advanced talks.
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China
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Pentagon bans the sale of Chinese cellphones on military installations
(04 May 2018) In an effort to step up the fight against Chinese government-sanctioned espionage targeting both the US military and American corporations, the Pentagon has banned the sale of mobile phones manufactured by ZTE Corp and Huawei Technologies, two Chinese firms. For security reasons, the Pentagon didn't get into the specific threats posed by these devices, but did verify that they presented a clear and present danger, and an "unacceptable risk." The founder of Huawei, Ren Zhengfei, is a former army officer within the People's Liberation Army and a friend of President Xi Jinping. Huawei is also under investigation for Iran sanctions violations. |
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Japan
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Look out, China, Japan just discovered a treasure chest of rare-earth metals off its shore
(12 Apr 2018) Massive amounts of rare-earth materials are needed to fuel the growth of high-tech devices and the electric car revolution. Unfortunately, China has used their inordinate share of these metals to hold the rest of the world hostage. In 2010, for example, China made the price of some precious metals spike by ten times when it cut its export rate. Japan, which has been especially hard-hit by China's bullying tactics, is about to change that. The US ally has discovered a treasure-trove of precious metals—perhaps as much as 16 million tons—in its waters near the Japanese island of Minamitori, according to a new report in nature.com. Ironically, it was China's heavy-handed approach that led Japan to begin searching the area for mineral deposits. Among the critical elements discovered: yttrium, europium, terbium, and dysprosium. |
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North
Korea |
It was American strength and resolve that forced North Korea to the bargaining table
(09 Mar 2018) No, we are not spiking the ball just yet, but it is absolutely more progress than has been made with respect to North Korea than at any other point in time in two generations. After placing severe pressure on the country with a strictly-enforced blockade of goods, South Korea's national security advisor made a major announcement outside the White House on Thursday: Kim Jong-un wanted to meet with President Trump, and he is open to the idea of a nuclear-free peninsula, and a continuation of US/South Korean military exercises. No, we are not going to pull a Neville Chamberlain here, but that represents a huge change from the dictator's attitude several months ago. The truth is, the American bluster and the American-enforced blockade of the country has led to an unsustainable condition in North Korea, and that has forced their hand. Will the president get any credit for this? Of course not. But who cares? A safer world is reward enough. |
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South Korea
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South Korea's chief cryptocurrency regulator found dead at age 52
(20 Feb 2018) We're not saying that anything fishy went on, but it sure does stink. South Korea had been a worldwide hotbed of cryptocurrency trading until recently. North Korea has embraced the use of cryptocurrencies—as could be expected from such a nefarious regime always looking for new ways to launder money and avoid the wrath of imposed international sanctions. Trading in digital currencies like bitcoin collapsed in South Korea after its chief regulator, Jung Ki-joon, decreed that virtual currencies were not a form of legal currency. Mr. Ki-joon also promised that more draconian regulatory measures would be taken in the coming months. It was shortly after these comments that bitcoin, once trading for nearly $20,000 per "coin," crashed down below $10,000. On Sunday, 52-year-old Ki-joon was found dead at his home. Coroners at first ruled the death an apparent heart attack, but they have backed off that claim. South Korean police have opened an investigation into Jung's death. |
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NOKO
China |
Shocker! China has been secretly shipping oil to North Korea, in violation of transfer of goods ban
Did anyone really expect the Chinese to abide by a transfer of goods ban on their trading partner to the immediate south, North Korea? It always amazes us how a certain group of individuals continually get snookered by communists, socialists, and dictators. As Ronald Reagan so eloquently and succinctly put it, we must "trust, but verify." The US Treasury Department has released spy satellite photos of Chinese ships transferring oil to North Korean ships in the Yellow Sea. Perhaps the Chinese didn't think our satellite technology was up to the task of busting them in such a blatant act on the open seas, or perhaps they thought they were still dealing with the previous administration. Nonetheless, we now have a record of at least 30 such transfers since October. Despite the photographic evidence, the Chinese government is denying the incidents took place. |
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Japan
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Abe's risky early-vote strategy paid off for him in Japanese elections
(23 Oct 2017) Prime Minister Shinzo Abe of Japan didn't need to call for national elections for at least the next year. Furthermore, his public-approval ratings took a hit earlier this year when he was accused of providing support to his friends in the Japanese business community. Nonetheless, in a relatively bold move, he called for early elections because he saw weakness and disarray in the ranks of his major opposition party, and his strong stance against North Korea has garnered him a recent spike in sentiment. Abe's bet paid off as coalition bloc maintained a super-majority in the lower house. This will give him impetus to push for a revision to the country's pacifist constitution. One of the major revisions would be an allowance for a military buildup to fight the nation's major threats—mainly North Korea. |
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The Philippines
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US to send advanced UAV system to the Philippines
A militant group linked to the Islamic State has been wreaking havoc on the southern Filipino island of Mindanao. On 23 May, several hundred Muslim fighters invaded the island’s city of Marawi in an attempt to launch a caliphate. While 86% of Filipinos are Roman Catholic and another 6% claim other branches of Christianity, some small pockets in the southern part of the country are predominantly Muslim. This group planned to take the city first, and then move outward from there. Beleaguered government troops have been battling this band of terrorists for the past four months. Now, a little help is coming to the troops compliments of the United States. The Trump Administration has authorized the deployment of the MQ-1C Gray Eagle, General Atomics’ (privately held) upgraded version of its super-effective Predator unmanned aerial vehicle. These vehicles will provide surveillance support to the Philippine military, and come loaded with infrared technology and the ability to launch a variety of offensive missiles. The Gray Eagle can remain airborne for 25 hours. For the military, now engaged in house-to-house combat to take the city back, this UAV system will provide exceptional support. The circumstances are unfortunate, but this battlefield region could provide the common ground for Washington and Manila to begin the process of rebuilding their once unshakable bond. (Reprinted from this coming Sunday's Penn Wealth Report) |
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North
Korea Japan |
Kim Jong-un continues to hammer nails in his own coffin
(29 Aug 2017) When will the world realize North Korea is being led by a deranged dictator who must be stripped of the power to acquire and use nuclear weapons? Proof of Kim Jong-un’s derangement can be seen in his country’s launch of a ballistic missile over sovereign Japanese land. Japanese Prime Minister Shinzo Abe, a strong and measured leader for that country, said, “North Korea’s reckless action is an unprecedented, serious, and grave threat to our nation.” Abe is not one for hollow words, like some of our past leaders and secretaries of state. Japan is slapping further sanctions on NOKO, which will make Jong-un even more insulated in his own little world. A world where advisors providing any semblance of bad news to the dictator are taken away and executed. The conditions on the Korean Peninsula are quickly becoming unsustainable, meaning something will, not may, eventually give. Investors need to be prepared for that inevitable event. |
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China
North Korea |
America's stance, not NOKO's actions, forced China's hand
(18 Aug 2017) Were there a vacuum outside of Kim Jong-un’s violent outbursts and military buildup, you can bet that China would sit quietly behind its longstanding trade policies. Instead, because of America’s reaction to the saber-rattling of the dictator, China’s hand has been forced. A full 90% of North Korean exports go to China, two countries separated, literally, by a bridge over the Yalu River. Put another way, of the $4 billion or so worth of goods—mainly commodities—that NOKO exports, China buys around $3.6 billion. The US made it overtly clear that it was not happy with China’s funding of Jong-un’s military buildup via income from exports, and that country is now taking steps to curb the trade. China has declared a “total ban” on coal imports from North Korea, and is also targeting seafood and iron ore imports from the country for the first time. The coal ban is of interest, because it apparently includes a full-fledged effort to stem the hyper-active coal smuggling trade which has been going on for years. If China is willing to maintain these new bans, the effect will absolutely be felt in Pyongyang. Not only will the military buildup face a severe cash crunch, the North Korean people will feel the pain even more than they already do (40% of the people already live below the poverty line). It’s not exactly like the people can protest the government (at least without facing certain death), but Jong-un’s iron grip on his country will certainly be loosened with further economic decay. In another positive sign, the Chinese president met directly with the US Chairman of the Joint Chiefs of Staff, Gen. Joseph Dunford, before the two countries signed an agreement aimed at improving communication during times of crisis. Under the agreement, a member of Dunford’s staff will be in regular communication with a Chinese counterpart. (Reprinted from this coming Sunday's Penn Wealth Report, Vol. 5, Issue 02.) |
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Korean
Peninsula |
US taking steps to reduce tensions on the Korean Peninsula
(18 Aug 2017) Following threats by the pot-bellied dictator of NOKO to launch nuclear missiles against Guam, a US island territory in the Western Pacific, it was beginning to feel like the days of Khrushchev, Castro and the Cold War had returned. Since then, however, the US has taken steps to defuse the tensions—at least temporarily. According to South Korean President Moon Jae-in, whom we are feeling a lot better about, he and President Trump had very cordial discussions, during which the president agreed to consult with Seoul before taking any military action against the North. Jae-in has also backed off of threats to dismantle the THAAD anti-defense missile shield the US deployed in that country to help protect it from missile strikes. North Korea and China called the system a provocation (odd, as it has no offensive capabilities, only defensive). We were initially concerned about the new South Korean president based on his desire to open up full negotiations with the North. It appeared that the staunch US ally in the region had elected a great appeaser, willing to get hornswoggled by his deranged counterpart to the north. Since the election, however, Jae-in has formed a good relationship with President Trump and has shown that he does, indeed, understand the threat. The United States has protected South Korea from attack for the past sixty-five years, and we currently have 28,500 American troops on the peninsula. For the sake of those troops, and the 51 million citizens of that country, an unbreakable alliance is critical. (Reprinted from this coming Sunday's Penn Wealth Report, Vol. 5, Issue 02.) |
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Japan
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(14 Aug 2017) Thanks to Abe's policies, Japan's economy is finally growing once again
After decades of stagnation—and a dethroning as the world's second-largest economy—signs of life are appearing within the Japanese economy. All of a sudden, the country has assembled a string of six consecutive quarters of positive growth, adding credibility to the policies of Shinzo Abe, a leader once labeled the Japanese Ronald Reagan. For the second quarter, economists were predicting an annualized growth rate of 2.5% in Japanese GDP; instead, the country's economic engine put together a 4% annualized growth rate. The markets have been predicting Abe’s success: the Nikkei 225 Index is up nearly 17% over the past year. |
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Philippines
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(07 Aug 2017) Philippines' bombastic leader meets with Tillerson, blasts Obama
Yes, Philippine President Rodrigo Duterte is a global wild-card. However, he poses no clear and present danger to global security like the pot-bellied dictator in North Korea or the mullahs in Iran. Furthermore, the US must maintain its relationship with this vital friend in the Southeast Asia—which soured tremendously under the former US president—to counter the Chinese threat in the region. To that end, Secretary of State Rex Tillerson had an excellent meeting with Duterte on Monday, with the latter calling himself "a humble friend" to the US. During the course of the meeting, however, he didn't mince words for his opinion of the previous administration. |
China's Hong Kong Problem
Hong Kong should have become a sovereign nation; instead, this modern culture is twisting under the thumb of Beijing
(27 Jul 2017) What a glaring juxtaposition of communism versus capitalism. Along the southeastern tip of Communist China, a nation struggling to feed its own people, existed a glittering jewel of freedom and economic prosperity. Thanks to the outcome of the First Opium War, Hong Kong became a British colony in 1842, with its citizens enjoying many of the personal rights so common in the West. Immigrants from China flooded the island, yearning for an economic freedom which would have been impossible to realize on the mainland. For the next 150 years, Hong Kong flourished. Then came 1997. (Read the rest of the story in the Penn Wealth Report, Vol. 5, Issue 02. Not a member? Visit Here.)
Hong Kong should have become a sovereign nation; instead, this modern culture is twisting under the thumb of Beijing
(27 Jul 2017) What a glaring juxtaposition of communism versus capitalism. Along the southeastern tip of Communist China, a nation struggling to feed its own people, existed a glittering jewel of freedom and economic prosperity. Thanks to the outcome of the First Opium War, Hong Kong became a British colony in 1842, with its citizens enjoying many of the personal rights so common in the West. Immigrants from China flooded the island, yearning for an economic freedom which would have been impossible to realize on the mainland. For the next 150 years, Hong Kong flourished. Then came 1997. (Read the rest of the story in the Penn Wealth Report, Vol. 5, Issue 02. Not a member? Visit Here.)
(19 Jun 2017) China's debt crisis is getting worse as Beijing encourages more risky lending. China is like a gambling addict living in Vegas, or an alcoholic who owns a bar. It is clear to the world that the country has built its GDP on a mountain of debt, some of which would make Obama's stimulus package actually look responsible; but even as the chickens are coming home to roost, the government is encouraging more. This week, China's banking regulator pressured the country's financial institutions to loan more to small companies, while also announcing tax breaks for banks which loan to individual rural households. What could possibly go wrong with that plan? Enormous bubble, anyone?
(24 May 2017) Moody's downgrades China on growing debt, slowing growth. Moody's Investor's Service has downgraded China for the first time in nearly 30 years. The downgrade, from Aa3 to A1, was brought about by the communist country's growing debt levels and slowing economic growth, with the rating agency questioning China's ability to sustain growth without continued stimulus. S&P may just follow in Moody's footsteps soon—last year it downgraded the outlook on its own "stable" rating, which is often a precursor to an actual credit rating drop. As bad loans mount in the country, many economists are not predicting that a massive bank bailout may be inevitable.
(Photo: smog isn't the only thing hanging over the heads of the Chinese people)
(Photo: smog isn't the only thing hanging over the heads of the Chinese people)
(06 Apr 2017) The two nut-jobs in Asia are a bigger headache for China than they are for the US. The day before Chinese President Xi Jinping flew to the US for meetings with President Trump, the pot-bellied dictator in North Korea fired four banned missiles into the ocean. Today, as the two world leaders were preparing to meet, the truly psychotic Philippines' President Rodrigo Duterte said he was ordering his troops to begin occupying uninhabited islands in the South China Sea—an area which China has claimed as its own (it isn't). Neither of these two incidents were coincidental, nor was their timing. They were both designed to take advantage of the spotlight shining on the meeting between the leaders of the largest and second-largest economies in the world. North Korea is, quite clearly, an enemy to the US, but Kim Jong Un poked a stick in the eye of Xi with his actions. Until the mentally-unstable Duterte took control in the Philippines, that nation was an important and reliable US ally in the region. While China's level of aggravation over these two issues is greater than Washington's, we must also remember our military commitment to protect South Korea and Japan. While Duterte is a nuisance, pot-belly now has missiles capable of hitting either country. (Photo: Duterte once promised to jet ski to the contested Spratley Islands region)
(30 Mar 2017) China's Xi to meet with Trump next week at Mar-a-Lago. This will be, perhaps, the most interesting meeting to date under the new administration. Chinese President Xi Jinping will travel to President Trump's Mar-a-Lago retreat in Florida next Thursday and Friday. As it will be the two's first meeting, expect a cordial, big-picture atmosphere, but here is what we anticipate: the US won't budge on the deployment of defensive weapons in South Korea; Trump will push Xi to rein in the pot-belly dictator in North Korea; trade will be discussed, but there will be only a promise of "more fair" trade; the press will portray Xi as the "adult in the room" and Trump as the bumbling neophyte, searching for solid footing (like they did Reagan at Reykjavík). Here is what Trump knows: the US has a GDP roughly double that of China, and US consumers are, by far, the largest buying block in the world. China has more to lose from a trade war than does the US.
(08 Mar 2017) Japan's economy needs to pick up steam. Economists forecasted a 1.4% growth rate for Japan in Q4, which would be nothing to write home about. Instead, the world's third-largest economy grew at just 1.2% over the three-month period. This did not change the estimates for 2016's growth rate in the country of just 1%. Prime Minister Shinzo Abe seems to be the right guy to spur growth, but it hasn't quite manifested just yet.
(Left: Remember in the mid-'80s when Japan's economy would "soon eclipse the US economy?")
(Left: Remember in the mid-'80s when Japan's economy would "soon eclipse the US economy?")
(17 Apr 2017) China said it is suspending all coal shipments from North Korea. It was reported that Donald Trump and Xi Jinping had an outstanding initial meeting down at Mar-a-Lago, with one major outlet calling the tête-à-tâte a "budding bromance." Sounds like the outcome of the election—who would have predicted it? The initial fruits of that meeting are now evident: China has announced that it will suspend all shipments of coal from the Norks as punishment for their continued ballistic missile testing. That is a huge blow to a country on the verge of economic ruin. Coal is little Kim Jong Un's largest export—it accounts for about 40% of all exports, and nearly every chunk goes to China. Will Shemp get the message? Not a chance. He would sooner see his own people starve to death.
31 May 2017 UPDATE. Korea's appeasement-minded new president, Moon Jae-in, has since ordered the standing-down of the THAAD system under the guise that four more launchers were placed in the country without his knowledge. That's baloney—he did not want to upset the Chinese by keeping the system online. Amazingly, Jae-in is a former human rights lawyer, so one would assume he understands that the greatest single physical threat to human rights sits across his northern border. Over the course of Moon Jae-in's upcoming five year rule, there is no reason to rule out a nightmare scenario unfolding on the peninsula.
American THAAD Missile System Arrives in South Korea
(07 Mar 2017) When it comes to making money in the stock market, the mainstream media can be one of our biggest assets...just not in the way you might think. Once you consider pieces in the Wall Street Journal or on CNBC or in the comically-slanted Businessweek to be written in code, and develop the ability to read through the false narratives, you have opened yourself up to a new world of insight. A great example of this can be illustrated by reviewing the story of our allies, the South Koreans, and their deployment of the US THAAD (Terminal High Altitude Area Defense) system.
Last month, as the financial press became almost possessed with the false narrative that President Trump was a protectionist about to get his lunch eaten by the far-superior Chinese trade negotiators, journalists began speculating that the THAAD deal was dead. They argued (and probably convinced even themselves) that our friends in South Korea would rather back out of a deal with the US than upset their mighty communist neighbor to the west.
Having monitored closely the relationship between the US and the ROK (Republic of Korea) for decades, we knew that the press’ assertion was garbage. We also believed that the system’s primary builder, Lockheed Martin (LMT $211-$269-$270), was under- to fairly-valued. Sure enough, just one day after the pot-bellied dictator in N Korea launched four missiles as “part of a training program for potential strikes against US bases in Japan,” the American weapon system began arriving at Osan Air Base, South Korea.
(Reprinted from this coming Sunday's Penn Wealth Report, Vol. 5 Issue 2. In the issue we also give a brief overview of the THAAD system.)
(07 Mar 2017) When it comes to making money in the stock market, the mainstream media can be one of our biggest assets...just not in the way you might think. Once you consider pieces in the Wall Street Journal or on CNBC or in the comically-slanted Businessweek to be written in code, and develop the ability to read through the false narratives, you have opened yourself up to a new world of insight. A great example of this can be illustrated by reviewing the story of our allies, the South Koreans, and their deployment of the US THAAD (Terminal High Altitude Area Defense) system.
Last month, as the financial press became almost possessed with the false narrative that President Trump was a protectionist about to get his lunch eaten by the far-superior Chinese trade negotiators, journalists began speculating that the THAAD deal was dead. They argued (and probably convinced even themselves) that our friends in South Korea would rather back out of a deal with the US than upset their mighty communist neighbor to the west.
Having monitored closely the relationship between the US and the ROK (Republic of Korea) for decades, we knew that the press’ assertion was garbage. We also believed that the system’s primary builder, Lockheed Martin (LMT $211-$269-$270), was under- to fairly-valued. Sure enough, just one day after the pot-bellied dictator in N Korea launched four missiles as “part of a training program for potential strikes against US bases in Japan,” the American weapon system began arriving at Osan Air Base, South Korea.
(Reprinted from this coming Sunday's Penn Wealth Report, Vol. 5 Issue 2. In the issue we also give a brief overview of the THAAD system.)
(15 Feb 2017) Kim Jong Un ordered assassination of half-brother. According to South Korean intelligence, the pot-belly dictator of North Korea ordered the hit that left his half-brother, Kim Jong Nam, dead. Nam, who was killed at a Malaysian airport by the use of a poisoned cloth, was once slated to take over for the two's mutual father, Kim Jong Il. Although he posed no threat to Un, the dictator's paranoia has become increasingly evident, and his actions more erratic. Another reason to be thankful for renewed American leadership in the region.
(Left: Kim Jong Nam was killed by his paranoid half-brother, dictator Kim Jong Un)
(Left: Kim Jong Nam was killed by his paranoid half-brother, dictator Kim Jong Un)
(07 Feb 2017) Mattis completes successful first mission in new role. US Defense Secretary General James "Mad Dog" Mattis has successfully concluded the first overseas trip by a Trump cabinet member. Call it the reassurance tour—he put to rest any concerns the leaders of South Korea and Japan may have had regarding our commitment to their security. While visiting, he warned North Korea that any attack on the United States or its allies in the region would be met with "a response that will be effective and overwhelming." Japan's Abe will be in the US to visit with the president this Friday. This will be the two's second meeting since the election. As for South Korea, Mattis reconfirmed plans for the country to deploy an advanced US missile defense system known as THAAD. China is vehemently opposed to the deployment, and the increased cooperation between the three nations. Brilliant trip.
(07 Feb 2017) Money fleeing China at an alarming rate. China's foreign exchange (FX) reserves, the money it needs to defend its currency and "control" economic policy, is flowing out of the country with expedience. As of the end of January, China breached the important psychological level of $3 trillion in reserves—a six year low. FX traders across the globe began liquidating their yuan positions over concerns that the communist Chinese government would devalue its currency further to foster more economic activity.
Bank of Japan makes a Strategic Policy Shift, but Does it Matter?
In theory, it seemed so simple: tell the Japanese people that a 2% inflation rate is on the horizon, and then pump a seemingly endless amount of freshly-printed yen into the economy to force inflation into existence.Problem is, what works behind the protected pillars of academia (think every pompous college professor you ever had) often falls flat—or worse—when battle tested.
That is the lesson which seems to be taking hold in the mind of Bank of Japan’s governor, Haruhiko Kuroda. This week Kuroda all but admitted defeat (prices for Japanese goods have been falling for the past 15 years in the country) when he abruptly changed his strategy for hitting the 2% goal.
Now, instead of simply pumping money into the economy and telling the Japanese people to start spending more of their discretionary funds, Kuroda has embarked down a rather odd path—announcing a 0% target rate for the 10-year Japanese government bond, and then adjusting its purchase of government bonds to assure that target is maintained.
The Japanese government, like central governments across the globe, is trying to deal with a flat-lining economy yielding little to no growth. There are a couple of factors unique to that country, however, which exacerbate the problem. One factor at play is Japan’s declining population. In 2008, the country had 128 million citizens. The government’s goal is now to keep the population above 100 million through 2060. With the working-age population shrinking, productivity suffers.
Secondly, the Japanese culture is one of thrift and prudence (opposite that of the American zeitgeist), and in tough economic times consumers tend to close their pocketbooks. Considering the fact that two-thirds of America’s GDP is the direct result of the American consumer spending, it is easy to understand why prices have stagnated on the Japanese mainland.
Will this new strategy work? It depends. Barring external factors, probably not. But Japan has a growing problem with China insofar as the South China Sea. It has already made it clear that it wants to beef up its military and increase its military ties with the US (as opposed to the nut-job now leading the Philippines). It took the onset of World War II to shake America out of its Great Depression; hopefully, in the case of Japan, something not quite so dramatic will do the trick.
Reprinted from this coming Sunday's Penn Wealth Report, Volume 4 Issue 37. Not a member? Join Here.
In theory, it seemed so simple: tell the Japanese people that a 2% inflation rate is on the horizon, and then pump a seemingly endless amount of freshly-printed yen into the economy to force inflation into existence.Problem is, what works behind the protected pillars of academia (think every pompous college professor you ever had) often falls flat—or worse—when battle tested.
That is the lesson which seems to be taking hold in the mind of Bank of Japan’s governor, Haruhiko Kuroda. This week Kuroda all but admitted defeat (prices for Japanese goods have been falling for the past 15 years in the country) when he abruptly changed his strategy for hitting the 2% goal.
Now, instead of simply pumping money into the economy and telling the Japanese people to start spending more of their discretionary funds, Kuroda has embarked down a rather odd path—announcing a 0% target rate for the 10-year Japanese government bond, and then adjusting its purchase of government bonds to assure that target is maintained.
The Japanese government, like central governments across the globe, is trying to deal with a flat-lining economy yielding little to no growth. There are a couple of factors unique to that country, however, which exacerbate the problem. One factor at play is Japan’s declining population. In 2008, the country had 128 million citizens. The government’s goal is now to keep the population above 100 million through 2060. With the working-age population shrinking, productivity suffers.
Secondly, the Japanese culture is one of thrift and prudence (opposite that of the American zeitgeist), and in tough economic times consumers tend to close their pocketbooks. Considering the fact that two-thirds of America’s GDP is the direct result of the American consumer spending, it is easy to understand why prices have stagnated on the Japanese mainland.
Will this new strategy work? It depends. Barring external factors, probably not. But Japan has a growing problem with China insofar as the South China Sea. It has already made it clear that it wants to beef up its military and increase its military ties with the US (as opposed to the nut-job now leading the Philippines). It took the onset of World War II to shake America out of its Great Depression; hopefully, in the case of Japan, something not quite so dramatic will do the trick.
Reprinted from this coming Sunday's Penn Wealth Report, Volume 4 Issue 37. Not a member? Join Here.
Filipino Bad Boy
The Philippines’ new president is a wild card in a region where we must retain influence
(16 Sep 16) President Obama shouldn’t feel too bad about being called a son of a whore by newly-inaugurated Filipino President Rodrigo Duterte; after all, he recently called Pope Francis a putang ina as well. Not to confuse these incidents with candidate Duterte calling Philip Goldberg, the US ambassador to Manila, a “gay son of a whore.” The silly name calling from a nation’s leader is disconcerting, but Duterte’s flirtations with the Chinese make him downright dangerous.
Read the entire story of how this nut-job came to power, and what it could mean for this critical region, in Sunday's Penn Wealth Report, Volume 4 Issue 37. Not a member? Join Here.
The Philippines’ new president is a wild card in a region where we must retain influence
(16 Sep 16) President Obama shouldn’t feel too bad about being called a son of a whore by newly-inaugurated Filipino President Rodrigo Duterte; after all, he recently called Pope Francis a putang ina as well. Not to confuse these incidents with candidate Duterte calling Philip Goldberg, the US ambassador to Manila, a “gay son of a whore.” The silly name calling from a nation’s leader is disconcerting, but Duterte’s flirtations with the Chinese make him downright dangerous.
Read the entire story of how this nut-job came to power, and what it could mean for this critical region, in Sunday's Penn Wealth Report, Volume 4 Issue 37. Not a member? Join Here.
US Destroyer Passes Through Disputed Islands in South China Sea
(27 Oct 15) The USS Lassen, a guided-missile destroyer, passed within 12 nautical miles of China’s man-made islands in the South China Sea. The Spratley Island region, which we wrote about in JWS Vol 3 Issue 9, resides in international waters, and the United States continues to exercise its right to be there. China, however, doesn’t see it that way. It issued an angry denouncement of the action, claiming the warship entered Chinese waters illegally.
The money quote came from US Navy Admiral Harry Harris, the head of USPACOM: “...the South China Sea is no more China’s than the Gulf of Mexico is Mexico’s.” According to international law, he is right. This region is in international waters, and the US DOD made clear its position: “We will fly, sail, and operate anywhere in the world that international law allows.” Other nations in the region, such as The Philippines, applauded the US position.
(Reprinted from this coming Sunday’s Journal of Wealth & Success, Vol. 3, Issue 42.)
Bad News for Communists—the Chinese Economy is on a Downhill Trajectory
(19 Oct 15) Sure, the US would kill to have a 7% real GDP growth rate, but for China, coming off double-digit GDP rates, the trend must be worrisome. Furthermore, the 6.9% “official government” growth rate, just announced for the 3rd quarter, has likely been inflated by an eager Communist Party trying to calm domestic and international jitters. Economists around the world are crying foul.
It seems impossible, based on the underlying data, that China’s production was actually that high, considering a real reduction in both imports and exports, along with three years of falling prices. To the Chinese central planners, who have already committed to a 7% growth rate for 2015, facts are just annoyances that try to get in the way. It is akin to the likes of a Fidel Castro or Hugo Chavez declaring that 99.8% of their respective citizenry pulled the lever for them. You can say it all you want, but the rest of the world doesn’t have to buy the comically incredulous.
Let’s throw some more cold water on the economic state of China. Even if the actual rate of growth did turn out to be 7% for 2015 (it won’t), it would still represent the weakest year in a quarter-century. The faulty logic of the Sinophiles’ argument swirls around the fact that they conveniently used the strongest growth rate for this emerging market, then sold us the assumption that the annual rate of growth would always be that strong. During the malaise of the late 1970s in the US, we were told that the near-zero growth rate in this country was the new paradigm in a shifting world. The 1980s blew that argument out of the water—it was a simple lack of leadership.
Similarly, a country whose iron-fisted leaders still embrace communism cannot simultaneously claim to have a free market economy. Eventually, the ruse will be exposed and the artifice will come crumbling down. The Chinese economy may not be quite as feeble as a Kangbashi high-rise, but it isn’t built on a layer of bedrock, either.
(Reprinted from this coming Sunday’s Journal of Wealth & Success, Vol. 3, Issue 41.)
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China Pounded: Shanghai Suffers Worst One-Day Loss Since 2007
(27 Jul 15) The communist Chinese government pulled out all the stops to prop up the country’s stock market following a 36% decline in six weeks. It appeared to be working for awhile, as investors tepidly got back in the water. It unraveled on Monday.
The Shanghai Composite Index, holder of 1,041 Chinese listings, fell an incredible 8.5% to open the trading week, signaling that the government cannot control the free market system the way it would like. Ironically, The Shanghai exists in a much more controlled environment than does, for example, the Hong Kong Stock Exchange, which is fully open to outside investors.
With a $5.5 trillion (USD) market cap, the Shanghai Exchange is the world’s third-largest, but it is very much controlled and manipulated by the central government, which imposes tight capital controls and limits how foreigners can invest. In other words, if the government cannot stop a dramatic one-day drop in this exchange, it certainly cannot prevent a deep decline in the other Chinese exchanges.
This will, hopefully, serve as a warning for novice investors who bought into the hype that the Chinese market is the place to be for explosive growth over the coming decade. Further evidence of just how fragile a communist-controlled, “free market,” house of cards economy actually is.
(Reprinted from the Journal of Wealth & Success, Vol. 3, Issue 30.)
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Chinese Growth Continues to Slow; Trade at Lowest Level since the 2008 Financial Crisis
(Mo, 11 May 15) One economic component we look at every morning is the price of various precious metals. We do this because materials such as gold, silver, and platinum are not priced in a vacuum—a change in their values almost always indicates an underlying condition. On Monday morning, we noticed that the futures price of palladium for June delivery fell $26, from $802 to $776 per ounce. That is of interest, because over half of the world’s supply of palladium ends up in catalytic converters— automotive devices that convert harmful exhaust pollutants into more benign substances.
Diving a little deeper into the drop, we find that auto sales in China fell to their weakest levels in over two years—a further indication of the communist-led nation’s cooling economy.
Further evidence of slowing came in the Chinese central bank’s decision to lower interest rates for the third time in six months in an effort to spur activity. It also announced that banks would be given more flexibility in setting rates they pay on depositors’ money. Ironically, the state-owned banks affected by the decision loan most of their money to state-owned companies.
Chinese trade data, while nowhere near as bad as the figures released in the US last week, showed that exports fell by 6.2% in April from April of 2014, following a 15% decrease March over March. Forecasters had predicted a 2.4% year over year gain in the April numbers. Unfortunately—and this is where China’s data disconnects from the US’—mainland imports fell 16% in April from last year, meaning the country still had a $34 billion surplus for the month.
On the global front, bad economic news for China spells rotten news for one of our great allies, Australia, which relies heavily on commodity exports to the country. The Aussie dollar fell to session lows on the trade report.
China’s economy grew by 7.4% last year, its slowest pace in a generation, and Beijing expects a 7% growth rate for 2015.
(Reprinted from next Sunday's Journal of Wealth & Success, Vol. 3, Issue 20.)
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China is Aggressively Moving into Disputed Areas of South China Sea
(19 Feb 15) Two years ago, we wrote about the growing tension between China and her neighbors with respect to the South China Sea. Our focus was on the Senkaku island group, or Diaoyu, as the Chinese refer to the archipelago. Now the focus has moved to the Spratly Islands, named after the captain of a British ship who charted the region in the 1840s. Once again, Chinese aggression is writing the narrative.
It may be called the South China Sea, but China is only one of a number of sovereign countries who share the waters. The Spratly Islands, in fact, are only 210 miles from the Philippines—three times closer than they are to China. That fact has not stopped China from dramatically expanding the construction of fortresses on the reefs, even building artificial islands in the area.
(Read the entire story in the Journal of Wealth & Success, Vol. 3, Issue 8. Not a member? Click Here.)
The Communist Party is Alive and Well and Ruling China
(12 Dec 13) When the Soviet Union collapsed, most Americans understood that this was the natural end to a form of rule dependent upon the complete subjection of citizens to a central power with absolute authority. As the Founding Fathers so ably pointed out, humans have an innate desire and yearning for personal freedom, and this drive will ultimately win out over collectivism. Unfortunately for its citizens, the ruling Communist Party of China refuses to consider this basic reality.
With their economy beginning to slow from its breakneck pace and an increasing number of Chinese moving up the financial ladder, commie bosses in provinces around the country have been convening party apparatchik to take part in compulsory study sessions. One "course" involves watching a six-part documentary on the Soviet Union's implosion, and how the communist system worked beautifully--it was simply betrayed by greedy individuals like Mikhail Gorbachev.
The film, and these study sessions are part of a larger propaganda campaign orchestrated by China's new leader, Xi Jinping (pronounced "she' gin ping") to enforce discipline within the ranks. Since assuming power last November, Jinping has rapidly moved to consolidate power. In a calculated methodology, he is moving to further open the economy to market forces, but reinforce communist ideology and clamp down on political opponents who would restrict party power.
China's communist leaders are, one might say, obsessed with the collapse of the Soviet Union, as the country's current political structure is based on the same Marxist principles. Instead of finding any fault at all in the collectivist system, it squarely places blame on a lack of discipline among Soviet leaders.
It is ironic that America is helping to sustain the current political system in China by importing a staggering $363 BILLION worth of goods (in 2013, according to the U.S.Census Bureau) per year. Subtracting the relatively small $96 billion we exported to mainland China in the last twelve months, that still leaves $267 billion in funds leaving the U.S. for Jinping's Chinese dream. If the Soviet Union had this kind of jack coming in from their sworn enemy, who knows how much longer the Berlin Wall would have remained intact.
American B-52s Challenge China's New Air Defense Zone
(26 Nov 13) Back in the first issue of Penn's "Journal" we discussed the not-so-covert Cold War raging in the archipelago between China and Japan (see "Tactical Awareness," Vol 1, Issue 1). Over the past week, the problem in the Senkaku Islands (or Diaoyu Islands to the Chinese) has escalated. Recall that these islands are claimed by both the Japanese and Chinese governments. This past weekend, China raised the stakes in the region by including the disputed area in part of its new "air defense zone" map of the East China Sea.
The United States took little time in telling the Chinese what it thought of its new defense map. On Monday afternoon, two days after the defense zone decree was announced, a pair of American B-52 bombers based in Guam flew directly over the disputed island chain without informing Beijing--something "demanded" in its Saturday proclamation. Prior the the flight, U.S. defense officials made it clear they had no intention of honoring the Chinese requirements.
China, which replaced Japan recently as the world's second-largest economy (though it sits substantially behind the U.S. economy), has been trying desperately to assert a leadership role in world affairs. While the press seems ready and willing to grant them a greater status than is warranted (the country has only one "questionable" aircraft carrier, for example), the United States remains committed to its allies in the region, namely Japan and South Korea.
Analysts believe that China may have overplayed its hand in this game, as the new defense zone will foment animosity not only with Japan and the U.S., but also with South Korea and Taiwan. Additionally, the flight of the B-52s, which was not pre-announced, leaves the Chinese military with egg on its face following its hollow security decree. China's Defense Ministry had warned that the Chinese military would take action against military aircraft which did not obey these new rules.
There are those in this country who believe that the United States should not be engaged militarily around the world, and who categorize Monday's bomber flight as a show of arrogance. These individuals do not understand the intricate web needed to maintain America's global interests. Hesitation on the part of the United States would be seen as weakness to those who would do us harm, either economically or militarily. It would also send a dangerous message to our allies that they might want to turn elsewhere for help. Monday's flight was a refreshing reminder to all that the U.S. has no intention of abandoning its strategic mission in the region, despite the wishes of the Chinese government--or a large percentage of the domestic press corps.
(27 Oct 15) The USS Lassen, a guided-missile destroyer, passed within 12 nautical miles of China’s man-made islands in the South China Sea. The Spratley Island region, which we wrote about in JWS Vol 3 Issue 9, resides in international waters, and the United States continues to exercise its right to be there. China, however, doesn’t see it that way. It issued an angry denouncement of the action, claiming the warship entered Chinese waters illegally.
The money quote came from US Navy Admiral Harry Harris, the head of USPACOM: “...the South China Sea is no more China’s than the Gulf of Mexico is Mexico’s.” According to international law, he is right. This region is in international waters, and the US DOD made clear its position: “We will fly, sail, and operate anywhere in the world that international law allows.” Other nations in the region, such as The Philippines, applauded the US position.
(Reprinted from this coming Sunday’s Journal of Wealth & Success, Vol. 3, Issue 42.)
Bad News for Communists—the Chinese Economy is on a Downhill Trajectory
(19 Oct 15) Sure, the US would kill to have a 7% real GDP growth rate, but for China, coming off double-digit GDP rates, the trend must be worrisome. Furthermore, the 6.9% “official government” growth rate, just announced for the 3rd quarter, has likely been inflated by an eager Communist Party trying to calm domestic and international jitters. Economists around the world are crying foul.
It seems impossible, based on the underlying data, that China’s production was actually that high, considering a real reduction in both imports and exports, along with three years of falling prices. To the Chinese central planners, who have already committed to a 7% growth rate for 2015, facts are just annoyances that try to get in the way. It is akin to the likes of a Fidel Castro or Hugo Chavez declaring that 99.8% of their respective citizenry pulled the lever for them. You can say it all you want, but the rest of the world doesn’t have to buy the comically incredulous.
Let’s throw some more cold water on the economic state of China. Even if the actual rate of growth did turn out to be 7% for 2015 (it won’t), it would still represent the weakest year in a quarter-century. The faulty logic of the Sinophiles’ argument swirls around the fact that they conveniently used the strongest growth rate for this emerging market, then sold us the assumption that the annual rate of growth would always be that strong. During the malaise of the late 1970s in the US, we were told that the near-zero growth rate in this country was the new paradigm in a shifting world. The 1980s blew that argument out of the water—it was a simple lack of leadership.
Similarly, a country whose iron-fisted leaders still embrace communism cannot simultaneously claim to have a free market economy. Eventually, the ruse will be exposed and the artifice will come crumbling down. The Chinese economy may not be quite as feeble as a Kangbashi high-rise, but it isn’t built on a layer of bedrock, either.
(Reprinted from this coming Sunday’s Journal of Wealth & Success, Vol. 3, Issue 41.)
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China Pounded: Shanghai Suffers Worst One-Day Loss Since 2007
(27 Jul 15) The communist Chinese government pulled out all the stops to prop up the country’s stock market following a 36% decline in six weeks. It appeared to be working for awhile, as investors tepidly got back in the water. It unraveled on Monday.
The Shanghai Composite Index, holder of 1,041 Chinese listings, fell an incredible 8.5% to open the trading week, signaling that the government cannot control the free market system the way it would like. Ironically, The Shanghai exists in a much more controlled environment than does, for example, the Hong Kong Stock Exchange, which is fully open to outside investors.
With a $5.5 trillion (USD) market cap, the Shanghai Exchange is the world’s third-largest, but it is very much controlled and manipulated by the central government, which imposes tight capital controls and limits how foreigners can invest. In other words, if the government cannot stop a dramatic one-day drop in this exchange, it certainly cannot prevent a deep decline in the other Chinese exchanges.
This will, hopefully, serve as a warning for novice investors who bought into the hype that the Chinese market is the place to be for explosive growth over the coming decade. Further evidence of just how fragile a communist-controlled, “free market,” house of cards economy actually is.
(Reprinted from the Journal of Wealth & Success, Vol. 3, Issue 30.)
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Chinese Growth Continues to Slow; Trade at Lowest Level since the 2008 Financial Crisis
(Mo, 11 May 15) One economic component we look at every morning is the price of various precious metals. We do this because materials such as gold, silver, and platinum are not priced in a vacuum—a change in their values almost always indicates an underlying condition. On Monday morning, we noticed that the futures price of palladium for June delivery fell $26, from $802 to $776 per ounce. That is of interest, because over half of the world’s supply of palladium ends up in catalytic converters— automotive devices that convert harmful exhaust pollutants into more benign substances.
Diving a little deeper into the drop, we find that auto sales in China fell to their weakest levels in over two years—a further indication of the communist-led nation’s cooling economy.
Further evidence of slowing came in the Chinese central bank’s decision to lower interest rates for the third time in six months in an effort to spur activity. It also announced that banks would be given more flexibility in setting rates they pay on depositors’ money. Ironically, the state-owned banks affected by the decision loan most of their money to state-owned companies.
Chinese trade data, while nowhere near as bad as the figures released in the US last week, showed that exports fell by 6.2% in April from April of 2014, following a 15% decrease March over March. Forecasters had predicted a 2.4% year over year gain in the April numbers. Unfortunately—and this is where China’s data disconnects from the US’—mainland imports fell 16% in April from last year, meaning the country still had a $34 billion surplus for the month.
On the global front, bad economic news for China spells rotten news for one of our great allies, Australia, which relies heavily on commodity exports to the country. The Aussie dollar fell to session lows on the trade report.
China’s economy grew by 7.4% last year, its slowest pace in a generation, and Beijing expects a 7% growth rate for 2015.
(Reprinted from next Sunday's Journal of Wealth & Success, Vol. 3, Issue 20.)
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China is Aggressively Moving into Disputed Areas of South China Sea
(19 Feb 15) Two years ago, we wrote about the growing tension between China and her neighbors with respect to the South China Sea. Our focus was on the Senkaku island group, or Diaoyu, as the Chinese refer to the archipelago. Now the focus has moved to the Spratly Islands, named after the captain of a British ship who charted the region in the 1840s. Once again, Chinese aggression is writing the narrative.
It may be called the South China Sea, but China is only one of a number of sovereign countries who share the waters. The Spratly Islands, in fact, are only 210 miles from the Philippines—three times closer than they are to China. That fact has not stopped China from dramatically expanding the construction of fortresses on the reefs, even building artificial islands in the area.
(Read the entire story in the Journal of Wealth & Success, Vol. 3, Issue 8. Not a member? Click Here.)
The Communist Party is Alive and Well and Ruling China
(12 Dec 13) When the Soviet Union collapsed, most Americans understood that this was the natural end to a form of rule dependent upon the complete subjection of citizens to a central power with absolute authority. As the Founding Fathers so ably pointed out, humans have an innate desire and yearning for personal freedom, and this drive will ultimately win out over collectivism. Unfortunately for its citizens, the ruling Communist Party of China refuses to consider this basic reality.
With their economy beginning to slow from its breakneck pace and an increasing number of Chinese moving up the financial ladder, commie bosses in provinces around the country have been convening party apparatchik to take part in compulsory study sessions. One "course" involves watching a six-part documentary on the Soviet Union's implosion, and how the communist system worked beautifully--it was simply betrayed by greedy individuals like Mikhail Gorbachev.
The film, and these study sessions are part of a larger propaganda campaign orchestrated by China's new leader, Xi Jinping (pronounced "she' gin ping") to enforce discipline within the ranks. Since assuming power last November, Jinping has rapidly moved to consolidate power. In a calculated methodology, he is moving to further open the economy to market forces, but reinforce communist ideology and clamp down on political opponents who would restrict party power.
China's communist leaders are, one might say, obsessed with the collapse of the Soviet Union, as the country's current political structure is based on the same Marxist principles. Instead of finding any fault at all in the collectivist system, it squarely places blame on a lack of discipline among Soviet leaders.
It is ironic that America is helping to sustain the current political system in China by importing a staggering $363 BILLION worth of goods (in 2013, according to the U.S.Census Bureau) per year. Subtracting the relatively small $96 billion we exported to mainland China in the last twelve months, that still leaves $267 billion in funds leaving the U.S. for Jinping's Chinese dream. If the Soviet Union had this kind of jack coming in from their sworn enemy, who knows how much longer the Berlin Wall would have remained intact.
American B-52s Challenge China's New Air Defense Zone
(26 Nov 13) Back in the first issue of Penn's "Journal" we discussed the not-so-covert Cold War raging in the archipelago between China and Japan (see "Tactical Awareness," Vol 1, Issue 1). Over the past week, the problem in the Senkaku Islands (or Diaoyu Islands to the Chinese) has escalated. Recall that these islands are claimed by both the Japanese and Chinese governments. This past weekend, China raised the stakes in the region by including the disputed area in part of its new "air defense zone" map of the East China Sea.
The United States took little time in telling the Chinese what it thought of its new defense map. On Monday afternoon, two days after the defense zone decree was announced, a pair of American B-52 bombers based in Guam flew directly over the disputed island chain without informing Beijing--something "demanded" in its Saturday proclamation. Prior the the flight, U.S. defense officials made it clear they had no intention of honoring the Chinese requirements.
China, which replaced Japan recently as the world's second-largest economy (though it sits substantially behind the U.S. economy), has been trying desperately to assert a leadership role in world affairs. While the press seems ready and willing to grant them a greater status than is warranted (the country has only one "questionable" aircraft carrier, for example), the United States remains committed to its allies in the region, namely Japan and South Korea.
Analysts believe that China may have overplayed its hand in this game, as the new defense zone will foment animosity not only with Japan and the U.S., but also with South Korea and Taiwan. Additionally, the flight of the B-52s, which was not pre-announced, leaves the Chinese military with egg on its face following its hollow security decree. China's Defense Ministry had warned that the Chinese military would take action against military aircraft which did not obey these new rules.
There are those in this country who believe that the United States should not be engaged militarily around the world, and who categorize Monday's bomber flight as a show of arrogance. These individuals do not understand the intricate web needed to maintain America's global interests. Hesitation on the part of the United States would be seen as weakness to those who would do us harm, either economically or militarily. It would also send a dangerous message to our allies that they might want to turn elsewhere for help. Monday's flight was a refreshing reminder to all that the U.S. has no intention of abandoning its strategic mission in the region, despite the wishes of the Chinese government--or a large percentage of the domestic press corps.
Any opinions expressed are those of Penn Wealth Management, LLC and are current only through the date posted. These views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is no guarantee of future results. Always consult your investment professional before investing any money.